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The Internal Revenue Service tweaked its annual tax instructions to account for non-fungible tokens (NFTs), replacing the term “virtual currency” with “digital assets,” which includes NFTs.
The move comes as cryptocurrency regulations develop around the world, and some aspects of the market, such as NFTs, are tougher to categorize than others. The rise of NFTs in 2021, which can be hard to regulate. led governments and financial agencies to turn their attention to them,
Key Takeaways
- IRS guidance on crypto taxation has been updated for 2022.
- The updated draft of the Form 1040 tax form for 2022 changes the term “virtual currency” to the broader “digital assets,” and explicitly refers to NFTs.
- In what may be a precedent, the IRS was granted a federal court order that allowed it to question a bank on whether some taxpayers may have failed to report and pay taxes on crypto transactions.
NFTs Get a Clearer Definition
The IRS has altered the wording of its tax guidance in recent years to account for the crypto market class as crypto investors wonder about how to record taxation for their NFTs.
The updated draft for Form 1040 also explicitly references NFTs. The guidance for cryptocurrencies says that if a particular asset has the characteristics of a digital asset, it will be treated as such for federal income tax purposes.
NFTs have lost some of their popularity this year. Still, many companies and brands are still entering the space.
The IRS last year began enforcing more stringent rules on cryptocurrency taxes and released more explicit rules. The 2022 tax guidance mandates payments in scenarios that include receiving digital assets as a payment or as a reward, through mining or staking, through a hard fork, selling them, and transferring them as gifts.
IRS Making Crypto Tax Filing Easier
The IRS has been working on crypto tax guidance since 2014 to make it more clear for taxpayers. The latest developments indicate that the agency is becoming more familiar with the crypto market and its terminology.
NFTs, mining, staking, hard forks, and other aspects of the technology have been accounted for in IRS guidance, which suggests increased knowledge of the industry’s subtleties at the federal tax service. This, in turn, helps crypto investors who want to be aboveboard about meeting their tax liability.
Meanwhile, the IRS aims to summon and fine those who fail to adequately pay tax on crypto activities. in September, the agency obtained a federal court order authorizing a summons for a bank to produce information about U.S. taxpayers who may have failed to report to the IRS, and pay taxes on, their cryptocurrency transactions.
The Bottom Line
The 2022 IRS tax instruction amendment on digital assets, including NFTs, evolves from the IRS’ previous guidance as the agency works to ensure that all aspects of the market are covered.
Crypto investors in the U.S. can take comfort in the fact that the digital-asset taxation process is becoming clearer. Such changes lend increasing legitimacy to the crypto market.