The Internal Revenue Service reminds taxpayers of their reporting and potential tax obligations on income from transactions from digital assets and foreign sources or holding certain foreign assets.
Understand Digital Asset Reporting and Tax Requirements
The IRS reminds taxpayers that there’s a question at the top of Forms 1040 and 1040-SR that asks about digital asset transactions. All taxpayers filing these forms must check the box indicating either “yes” or “no.”
If an individual disposed of any digital asset that was held as a capital asset through a sale, exchange or transfer, they should check “Yes” and use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss and report it on Schedule D (Form 1040), Capital Gains and Losses, or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, in the case of a gift.
Examples of transactions involving digital assets include:
- A sale of digital assets.
- The receipt of digital assets as payment for goods or services provided.
- The receipt or transfer of digital assets for free (without providing any consideration) that does not qualify as a bona fide gift.
- The receipt of new digital assets as a result of mining and staking activities.
- The receipt of new digital assets as a result of a hard fork.
- An exchange of digital assets for property, goods or services.
- An exchange/trade of digital assets for another digital asset(s).
- Any other disposition of a financial interest in digital assets.
If individuals received any digital assets as compensation for services or disposed of any digital assets they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1a, or inventory or services on Schedule C).
More information on digital assets can be found in the Instructions for Form 1040 and 1040-SR and on the IRS’ Digital Assets page.
Report Foreign Source Income
A U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States.
U.S. citizens and resident aliens must report unearned income, such as interest, dividends and pensions from sources outside the United States unless exempt by law or a tax treaty. They must also report earned income, such as wages and tips, from sources outside the United States.
An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are available only if an eligible taxpayer files a U.S. income tax return.
A taxpayer is allowed an automatic two-month extension to June 15 if both their tax home and abode are outside the United States and Puerto Rico. Even if allowed an extension, a taxpayer will have to pay interest on any tax not paid by the regular due date of April 18, 2023.
Those serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also qualify for the extension to June 15. IRS recommends attaching a statement if one of these two situations applies. More information can be found in the Instructions for Form 1040 and Form 1040-SR, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad and Publication 519, U.S. Tax Guide for Aliens.
Reporting Required For Foreign Accounts and Assets
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and foreign bank and other financial accounts. In most cases, affected taxpayers need to complete and attach Schedule B (Form 1040), Interest and Ordinary Dividends, to their tax return. Part III of Schedule B asks about the existence of foreign accounts such as bank and securities accounts and usually requires U.S. citizens to report the country in which each account is located.
In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. See the instructions for this form for details.
Further, separate from reporting specified foreign financial assets on their tax return, U.S. persons with an interest in or signature or other authority over foreign financial accounts where the aggregate value exceeded $10,000 at any time during 2022 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Because of this threshold, the IRS encourages U.S. persons with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is available only through the BSA E-filing System website.
The deadline for filing the annual Report of Foreign Bank and Financial Accounts (FBAR) is April 15, 2023. FinCEN grants U.S. persons who miss the original deadline an automatic extension until Oct. 15, 2023, to file the FBAR. There is no need to request this extension.