IRS Adds Digital Asset Question to 2023 Business Tax Returns

March 22, 2024

Tax returns for partnerships, corporations, S corporations, and estates and trusts have a new question added to the forms this year regarding digital assets. The IRS announced that Form 1041, U.S. Income Tax Return for Estates and Trusts; Form 1065, U.S. Return of Partnership Income; Form 1120, U.S. Corporation Income Tax Return; and Form 1120-S, U.S. Income Tax Return for an S Corporation all include the question businesses must answer regarding their digital asset activity. The question is similar to the one that the IRS has included on individuals’ tax returns for several years now.

The question, which is tailored to fit the context of the various forms, asks:

At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or financial interest in a digital asset)?

Since this is the first year this question appears on business tax returns, you may understandably be confused about how to handle the question or be concerned in general about reporting your business’ cryptocurrency transactions. Gordon Law’s team of experienced crypto accountants can assist your business with its cryptocurrency reporting.

We’ve put together this guidance regarding the digital asset question to help answer some of your questions.

Do You Answer Yes or No?

The IRS reminds all taxpayers filing one of these forms that they must answer the yes-or-no question even if they did not transact with digital assets during the year. If your business is completing one of the forms with the question, you should answer “Yes” if the business transacted with digital assets for any of the following reasons:

  • Received digital assets as a payment for property or service
  • Received digital assets from a reward or award
  • Received digital assets from mining, staking, or other similar activities
  • Received digital assets from an airdrop or hard fork
  • Disposed of digital assets in exchange for property or services
  • Disposed of digital assets in exchange for another digital asset
  • Sold a digital asset
  • Disposed of any other financial interest in a digital asset

Taxpayers are advised to answer “No” to the question if they did not engage in any of the transactions listed above, and only held the assets in a wallet or account; transferred the digital assets between wallets or accounts that they own or control; or purchased digital assets using USD or other fiat currency.

Pro Tip: Incorrectly answering “No” could be considered an attempt to conceal income from the IRS and can put you at risk of a criminal tax investigation. Reach out to our experienced crypto tax attorneys if you have any questions.

How to Report Cryptocurrency on Your Business Tax Return

If your business answers “Yes” to the digital asset question, then you must report the income from your digital asset transactions on your tax return. We have a detailed guide on reporting cryptocurrency on tax returns, but essentially, how you report the income depends on how the digital asset is received or disposed of.

If you sell or trade digital assets, you will have either a capital gain or loss from the transaction. But if you receive digital assets as income for services, staking, mining, interest, original NFTs, etc., the amount is taxed as ordinary income.

The tax implications of digital assets are even more complicated for businesses since most crypto tax software available does not provide GAAP-compliant crypto accounting.

Pro Tip: If your business has held digital assets in prior years but is only reporting the activity this year, you need to go back to the beginning and review prior year activity to ensure your cost basis is accurate.

Need Help with Crypto Tax Reporting for Business?

To ensure your business is accurately reporting the information related to your cryptocurrency, we recommend you contact an experienced crypto tax professional for help. Gordon Law is a leader in the cryptocurrency law and taxation space and can help your business navigate the complexities of reporting your digital asset transactions. Reach out to us today to see how our team can save you time and money.

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