The IRS Expands The Scope Of Digital Asset Taxation

As reported on October 31st, the United States Internal Revenue Service (IRS) expands the scope on the digit asset taxation. A 2022 instruction draft released by the agency changed the category from “virtual currency” to “digital assets,” thereby expanding the scope of taxation for American taxpayers. In the draft, the IRS defines “digital assets” as “…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 stable coins…” If the taxpayers are now using virtual currencies as payments or capital assets, IRS will tax their digital assets. This applies to any American who paid for a commodity using a digital currency, received a digital asset as a reward, traded digital assets for fiat currency or other digital assets or acquired new assets through block reward mining or staking. The type of tax will depend on how the taxpayers use their digital assets throughout the year and can fall into either capital gains or income sections, with the former for those who hold them as assets and the latter for people who received payment in digital assets or sold them to other clients. The update comes as the IRS gradually broadens its pursuit of digital asset taxes. Last month, a New York judge ordered the IRS to issue summons to M.Y. Safra Bank and request information about U.S. taxpayers who might understate or fail to pay their digital asset taxes. That relates to comment from IRS Commissioner Charles Retting who said, “the government’s ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats.”