Investors in digital assets such as cryptocurrencies and non-fungible tokens (NFTs) have been on a wild ride in the past few years. After all, the price of one bitcoin
BTC
It reached an all-time high of over $65,000 in November of 2021 before dropping to around $20,000 in June of 2022 and staying in that range ever since. In the meantime, many popular NFTs like rocks have either gone down in value or been wiped out entirely.

With that in mind, not many cryptocurrency investors will have to worry about paying taxes on winnings this year. With prices dropping and many investors stopping to see better days, many won’t make any real gains to claim.

However, investors selling or using cryptocurrencies and NFTs will still face many scenarios in 2022 that require reporting to the Internal Revenue Service (IRS.gov). You may have noticed an update on the 2021 IRS Form 1040, which asked this very specific question at the top of the page last year:

β€œAt any time during 2021 did you receive, sell, exchange or dispose of any financial interest in any virtual currency?”

You can also expect an updated version of this question on the new Form 1040 for 2022. We know this because the IRS released a draft of the form, which you can find here.

The new question asks:

At any time during 2022, would you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or financial interest in a digital asset)? “

This huge question aims to ensure that file owners consider digital assets other than crypto, such as NFTs. It is also supposed to be more comprehensive for cryptocurrencies earned as a reward through various projects, including games that are played for profit.

Tax considerations for digital assets in 2022

But, what exactly do you have to report to the IRS? It really depends on your level of involvement in the digital assets, as well as how the assets you’ve come across this year will be sold or eventually disposed of.

According to attorney Asher Rubinstein of Gallet Dreyer & Berkey, individuals who have received, sold, exchanged, given or disposed of cryptocurrency, NFTs and other digital assets this year will need to check the box that says β€œyes” next to this question on IRS Form 1040. Depending on the level of participation, more reporting is needed, he says.

Rubinstein provides the following examples of situations in which the IRS will report your involvement in crypto and owe taxes on the gains as a result.

Example 1: You received payment in a cryptocurrency. β€œIf you are paid in cryptocurrency, that counts as income to you, just as if you were paid in US dollars or your compensation included shares,” Rubinstein says. β€œYou must report the crypto reimbursement on your income tax return, IRS Form 1040.”

Second example: You sold crypto to someone else. Rubinstein says this counts as a disposal of property, just as if you were selling stock or real estate. As a result, you are required to report the capital gain or loss from the sale of cryptocurrency to the IRS. β€œTo properly report a gain or loss from cryptocurrency, taxpayers must file IRS Form 8949 and Form 1040 Schedule D, which are applicable to both short and long-term capital assets,” he says.

Example #3: You have exchanged or used cryptocurrency to buy something, such as a car or a boat. β€œImagine you bought bitcoin for $5,000 several years ago, and now that one coin is worth $20,000,” says Rubinstein. If you exchange that bitcoin for a $20,000 car, you might feel like you're exchanging two items of similar value.

However, the US tax code does not see it that way. In fact, they see that you earned $15,000 in taxable income through bitcoin earnings. β€œIt's like buying $5,000 worth of stock and selling it for $20,000," says Rubinstein.

Example #4: You earned interest on a crypto savings account. You still own the cryptocurrency in this scenario, but you lend it to a cryptocurrency exchange for a fee. With crypto savings accounts, "the fees you earn are taxable income," says Rubinstein.

Example 5: I used a cipher for "staking". This happens when crypto is put on a blockchain like Ethereum in order to maintain that network. β€œRewarding more cryptocurrencies is taxable income,” says the lawyer.

Example 6: I used cipher to purchase NFT. Rubinstein says that NFTs are usually bought with cryptocurrency, and this opens the door to at least three potential tax events. First, you could be taxed on value gains from the time you purchase cryptocurrencies and use them to purchase NFTs. Second, you may owe taxes on the sale of the NFT if you sell it for more than you bought it for. Third, NFTs that generate residual income may require additional reporting and taxable income.

What should you not report to the IRS?

According to Rubinstein, it is still possible to own digital assets without having to report detailed information to the IRS.

"You don't have to report income that you didn't make or didn't actually receive," he says.

In other words, owning a digital asset while its value is appreciating is not a taxable event because you have not yet earned income from the appreciation in value. When you sell the digital asset for a profit, you now have "realized" the income, and this is a taxable event.

If you lose money from your digital assets investment this year, this is another scenario in which you won't owe income taxes. Through a process called tax loss harvesting, however, you may be able to recoup up to $3,000 in gains on other investments in the same tax year.

If you're interested in how this works, you can read the IRS's Frequently Asked Questions (FAQ) page about cryptocurrency transactions.

If you're still confused about whether you owe taxes on virtual assets, how much you need to pay, or whether you can write off losses against taxable income (and if so, how much), work with a knowledgeable accountant Cryptocurrency when you file your taxes can help you.