As the digital asset market continues to grow and fluctuate, the Internal Revenue Service (IRS) is ramping up its efforts to ensure compliance and enforce regulations. According to the IRS Criminal Investigation Annual Report for 2022, the agency seized a record amount of data and cryptocurrency, totaling $7 billion in digital assets for the fiscal year 2022, which doubled the previous year's total.
In response to this trend, the IRS has updated its guidance on tax principles applied to virtual currency transactions and expanded its definition of virtual currencies to include all forms of digital assets, including non-fungible tokens and stablecoins. This move is reflected in the updated Form 1040 for the 2022 tax year, which now asks taxpayers to disclose whether they "received (as a reward, award, or compensation); or sold, exchanged, gift, or otherwise disposed of a digital asset (or a financial interest in a digital asset)" during the year.
The IRS is also taking steps to increase reporting transparency by developing new forms, including the 1099-Digital Asset (1099-DA) and 8300-DA (8300-DA). While no implementation date has been set for these forms, their introduction is expected to provide the IRS with more data to inform its compliance efforts.
In addition to these measures, Congress has provided the IRS with an additional $45 billion for enforcement activities, including "digital asset monitoring and compliance activities." This funding has allowed the IRS to create teams and establish a new project director of IRS Digital Assets, who will oversee the implementation of the agency's digital asset strategy and work with business units to enhance compliance and customer service.
Furthermore, the IRS has enlisted the help of third parties to track digital asset transactions through forensic tracing of the blockchain and the use of software and technology to process digital asset exchange data.
Overall, it is clear that the IRS is taking swift action to address the potential for non-compliance in the digital asset market and ensure that taxpayers are accurately reporting their holdings. As the market continues to evolve, it is likely that the IRS will continue to dedicate more resources to these efforts in the coming years.