Accounting for digital assets or income on a tax return is still new to the Internal Revenue Service (IRS). The current laws regarding digital property with material value are somewhat lax, but you must still report these assets to the IRS.
Taxpayers must answer a question on their returns to address digital property. How you answer that question depends on whether you engaged in transactions involving these assets.
What are some examples of digital assets?
A digital asset generally refers to electronic representations of anything created and stored electronically that has or provides value. The IRS offers three examples of digital assets:
- Non-fungible tokens (NFTs)
- Convertible virtual currency and cryptocurrency
Online property like email and social media accounts are considered digital assets, but since they have no monetary value, you need not report them. The IRS only cares about digital property that provides or has actual value.
How should you answer the tax question?
The new question regarding electronic property is relatively simple. It asks if you have received or disposed of digital assets during the previous tax year.
Answer yes if you:
- Received digital assets as a form of payment, award or reward
- Sold electronic assets or traded them for other digital property
- Paid for services or property with digital assets
- Gifted (for free) electronic assets to other parties
You can answer no to this question if you own such assets, but:
Made no transactions with them
- Only transferred them to a separate account
- Purchased digital assets with actual currency
If you want to estimate how much you may owe the IRS on your electronic assets, consider strategizing with a tax professional who understands federal and Illinois tax laws.