As tax season approaches, it’s crucial for taxpayers to understand their obligations regarding the reporting of various types of income. This guide provides important information on reporting digital asset transactions, income from the gig economy, foreign source income, and assets held abroad.
Reporting Digital Asset Transactions
Digital assets, including cryptocurrencies, are increasingly popular forms of value exchange. Taxpayers must report all income earned from digital asset transactions on their tax returns. This includes income from:
- Receiving digital assets as payment for goods or services.
- Transferring digital assets as gifts.
- Receiving digital assets as rewards or prizes.
- Receiving new digital assets from mining, staking, or similar activities.
- Receiving digital assets from a hard fork.
- Disposing of digital assets for property or services.
- Exchanging one digital asset for another.
- Selling digital assets.
All taxpayers filing Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120-S must answer a question regarding digital assets. It is important to answer this question truthfully, regardless of whether you participated in any digital asset transactions in 2023.
Reporting Requirements
If you answered “Yes” to the question on digital assets, you must also report all income related to your digital asset transactions. For example, if you sold a digital asset that was a capital asset, you must use Form 8949 to calculate your capital gain or loss and report it on Schedule D (Form 1040).
If you received digital assets as salary, you must report the value of the assets received. Similarly, if you worked as an independent contractor and were paid with digital assets, you must report this income on Schedule C (Form 1040). Schedule C is also used by anyone who sold, exchanged, or transferred digital assets to clients in connection with a trade or business.
Answering “No” to the Question
If you simply held digital assets during 2022 and did not engage in any transactions involving digital assets, you may answer “No” to the question. You may also answer “No” if your activities were limited to:
- Holding digital assets in a wallet or account.
- Transferring digital assets between wallets or accounts you control.
- Purchasing digital assets with U.S. currency or other real currency, including through electronic platforms like PayPal and Venmo.
For more information, consult the Frequently Asked Questions (FAQ) and other details available on the Digital Assets page on IRS.gov.
Gig Economy Income
Income earned from the gig economy, such as providing labor, services, or goods on demand, is generally taxable and must be reported to the IRS. Examples of gig economy work include:
- Providing temporary, part-time, or side work.
- Being paid in digital assets such as cryptocurrencies, as well as cash, goods, or property.
- Not reported on an information return like Form 1099-K, 1099-MISC, W-2, or other income statement.
Taxpayers must report all gig economy income on their tax return, even if the income is:
- Not reported on an information return.
- Derived from work outside the traditional employment sector.
Visit the Gig Economy Tax Center for more information about the gig economy.
Service Industry Tips
Individuals working in service industries such as restaurants, hotels, and beauty salons often receive tips from customers. All cash tips must be reported to the employer, who must include them on Form W-2. This includes direct cash tips from customer to employee, tips from one employee to another, electronically paid tips, and other tip-sharing agreements.
Non-cash tips include value received in any medium other than cash, such as passes, tickets, or other goods or merchandise given to the employee by a customer. Non-cash tips are not reported to the employer but must be reported on the tax return.
Any tips not reported to the employer must be separately reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and included as additional income on the tax return. The employee must also pay their share of Social Security and Medicare tax owed on those tips.
Employees in the service industry are not required to report tip amounts under $20 per month per employer. For amounts over this threshold, employees must report the tips to the employer by the 10th day of the month following the month in which the tips were received.
For more information on how to report tips, refer to How to Report and Declare Tips on IRS.gov.
Foreign Source Income
U.S. citizens and resident aliens are generally subject to U.S. income tax on worldwide income, regardless of where they live. They must also meet the same 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 non-work-related income, such as interest, dividends, and pensions, from foreign sources unless exempted by law or treaty. They must also report work-related income, such as wages and tips, from foreign sources.
A tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income Exclusion or 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.
Taxpayers serving in the military outside the U.S. and Puerto Rico on the regular due date of their tax return also qualify for an extension until June 15. The 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, and Publication 519.
Foreign Accounts and Assets
Federal law requires U.S. citizens and resident aliens to report their worldwide income, including income from foreign trusts and bank accounts and other foreign financial accounts. In most cases, affected taxpayers must 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 generally requires U.S. citizens to report the country in which each account is located.
Additionally, some taxpayers may also need to complete and attach Form 8938, Statement of Specified Foreign Financial Assets. Generally, U.S. citizens, resident aliens, and certain nonresident aliens must report specific foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds. Refer to the form’s instructions for more details.
Furthermore, U.S. persons with an interest in, or signature or other authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any time during
2023 must electronically file a Form 114 Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury. Due to 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.
The deadline for filing the FBAR is April 15, 2024. FinCEN grants U.S. persons who miss the original deadline an automatic extension until October 15, 2024, to file the FBAR. No request for this extension is required. Refer to the FinCEN website for more information.
By understanding and meeting their tax obligations, taxpayers can ensure compliance with the law and avoid potential penalties. For more information on these topics, visit IRS.gov.
Note: This article provides general information and should not be considered tax advice. Taxpayers should consult with a tax professional for personalized guidance based on their specific circumstances.
