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- IRS updated the Tax Guidelines for NFTs in its recent draft.
- The 2022 Tax Form Draft was released on October 17, 2022, which gave more clarity on how to report digital assets on IRS 1040 income tax forms.
- NFTs came under the same tax authorities as Stablecoins, Cryptocurrencies.
As per the recent update, now the Federal Court is allowed to ask the question to a bank on whether some taxpayers may have failed to report and pay taxes on crypto transactions.
IRS 2022 Updated Draft
The U.S. Internal Revenue Service (IRS) added in its recent IRS 2022 Tax Year Guide that “Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.”
While it can be seen that in 2014, the IRS issued a Notice 2014-21, 2014-16 I.R.B. 938 PDF, that explains virtual currency is treated as property for Federal income tax purposes and provides examples of how long standing tax principles applicable to transactions involving property apply to virtual currency. This further added frequently asked questions (“FAQs”) along with the examples provided in Notice 2014-21.
IRS Changed “Virtual Currency” to “Digital Assets”
According to the IRS, “Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency.”
It further added that, “if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.”
Virtual Currency for “Federal Income Tax Purpose”
As mentioned by the IRS “the Virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.”
It must be noted that the 2022 IRS tax instruction amendment on digital assets, that include NFTs developed from the IRS’ previous guidance. Whereas the agency works to insure that all aspects of the market must be covered.
On the other hand, the U.S. crypto investors now can easily understand the fact that the digital asset taxation process in the country, becoming more clear. And, additionally, this kind of step from any government agency can increase legitimacy to the crypto industry.
Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.
