"Digital Assets," Not "Virtual Currency": The Reworded 1040 Question and the FTX Loss Problem

Key takeaways

• The 2022 Form 1040 asks whether you "received (as a reward, award, or payment for property or services), sold, exchanged, or otherwise disposed of a digital asset (or a financial interest in a digital asset)" — a broader formulation than prior years' "virtual currency" language.
• The question now explicitly encompasses gifts and NFTs. Receiving a digital asset as a gift does not trigger income recognition, but it does require answering "Yes" — a fact that many filers will miss.
• FTX filed for Chapter 11 bankruptcy on November 11, 2022. Customers with assets on the FTX exchange cannot simply claim a theft loss or worthlessness deduction for the 2022 tax year — the tax treatment depends on facts that are not yet established.
• The correct approach to FTX-related positions in 2022 is to document facts, preserve loss documentation, and avoid premature deduction claims that may need to be amended or defended.

The 2022 digital-asset question

What changed

The 2021 Form 1040 asked: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" The question appeared at the top of page 1.

The 2022 Form 1040 (draft issued September 2022; finalized for year-end filing) replaces "virtual currency" with "digital asset" and adds "received (as a reward, award, or payment for property or services)" and gift-received scenarios to the list of covered events.

The revised question reads: "At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

What triggers "Yes"

Under current IRS guidance, the following require a "Yes" answer:

• Receiving cryptocurrency, stablecoins, or other digital assets as wages, compensation, or payment for services
• Selling or exchanging digital assets for cash or other property
• Converting one cryptocurrency to another (treated as a taxable exchange)
• Using digital assets to purchase goods or services
• Receiving digital assets as a reward (e.g., staking rewards, mining income) — treated as ordinary income at fair market value on date of receipt
• Receiving digital assets as an airdrop
• Receiving a digital asset as a gift

What does not trigger "Yes"

Under current IRS guidance: - Purchasing digital assets with cash (holding only — no disposition) - Transferring digital assets between wallets the taxpayer controls (no change in beneficial ownership) - Simply holding digital assets that declined in value — no recognition event has occurred

The gift-received scenario is the most significant change in the 2022 question and the one most likely to be missed. A taxpayer who received crypto as a birthday gift, received an NFT as a promotional award, or was transferred digital assets from a family member must answer "Yes" — even though no income was realized on receipt and the gift creates a carryover basis position, not a taxable event.

The FTX collapse: what the tax law allows and does not allow in 2022

FTX Trading Ltd. and affiliated entities filed for Chapter 11 bankruptcy on November 11, 2022. As of December 31, 2022, assets held by customers on the FTX platform were frozen — neither tradeable nor withdrawable for most customers. The bankruptcy proceedings remain pending as of this writing.

The theft-loss framework

Prior to the Tax Cuts and Jobs Act, a theft loss was deductible as a casualty and theft loss under IRC § 165. The TCJA suspended the personal casualty and theft loss deduction for losses occurring in tax years 2018 through 2025, with a narrow exception: losses attributable to a federally declared disaster.

IRS Revenue Ruling 2009-9 addressed theft losses in Ponzi scheme contexts, holding that victims could claim a theft deduction under IRC § 165(c)(2) as a loss incurred in a transaction entered into for profit. For an FTX customer, the analogous argument would be that an exchange collapse attributable to fraudulent conduct by the operators — not merely business failure — could support a theft-loss deduction under § 165(c)(2), which is a different provision than the TCJA-suspended personal casualty rule.

The critical problems with claiming this deduction in 2022:

The criminal investigation is not complete. A theft-loss deduction requires that a theft occurred — a legal determination. As of December 2022, criminal proceedings and civil investigations are ongoing. The characterization of what occurred at FTX (fraud, misappropriation, inadequate controls, or some combination) is not yet legally established.

The loss amount is not fixed. Customers do not know what, if anything, they will recover through the bankruptcy process. A deductible theft loss is generally the amount of the loss reduced by any reasonable expectation of recovery. With bankruptcy proceedings ongoing and recovery amounts unknown, the net loss is not determinable with reasonable certainty.

The safe-harbor conditions are not yet met. Rev. Proc. 2009-20 established a safe harbor for theft-loss deductions in Ponzi schemes. It requires that the lead figure (the "qualified investor in a fraudulent arrangement") have been charged with fraud. As of December 2022, charges were filed against FTX founder Samuel Bankman-Fried on December 12, 2022. That development may ultimately support a safe-harbor claim — but the full conditions under the revenue procedure, including adequate documentation of the investment and loss amounts, must be met.

The worthlessness alternative

If digital assets held on FTX are treated as securities, IRC § 165(g) allows a capital loss deduction in the year the securities become worthless, treated as a sale or exchange. The problems: cryptocurrency is generally not a "security" for § 165(g) purposes unless it constitutes equity or debt in an entity that is a security. Most exchange tokens and cryptocurrency holdings do not meet that definition.

If the assets are not securities, a § 165 loss is recognized when the asset is disposed of or when it becomes objectively worthless with no reasonable expectation of recovery. As of December 31, 2022, neither has clearly occurred — the bankruptcy proceedings keep open the possibility of some recovery.

The prudent approach for 2022

Document the facts carefully: - Amount of assets held on FTX as of the exchange freeze date - Cost basis of those assets - Current status of the bankruptcy proceedings - Any amounts recovered or expected to be recovered

Do not claim a deduction that requires completed factual predicates not yet established. The deduction, if available at all, will become cleaner as the bankruptcy resolves and as the criminal proceedings establish the factual and legal nature of what occurred. An overstated 2022 loss claim is worse than waiting — it creates an amended-return obligation and audit exposure.

Frequently asked questions

My assets were on another exchange that is still operating — do I have any 2022 issue?

Holding digital assets on a solvent, operating exchange does not create a loss. A decline in value is unrealized and not deductible. Answer the digital-asset question based on whether you had a taxable event during the year.

I received a small amount of cryptocurrency as a promotional reward in 2022. Do I owe tax on it?

Yes. Digital assets received as a reward or airdrop are ordinary income at fair market value on the date of receipt. The amount must be reported even if it is small. Your cost basis for subsequent sale purposes equals the amount included in income.

I gave cryptocurrency to a family member as a gift. Do I have a tax issue?

Gifts of digital assets are not taxable events for the donor if the fair market value at time of gift is below the annual exclusion amount ($16,000 per donee in 2022). The donee's basis is a carryover of the donor's basis. Both donor and donee should answer "Yes" to the 1040 digital-asset question.

Bottom line

The broadened 2022 Form 1040 question reaches more taxpayers than the prior-year version, and answering it incorrectly carries real enforcement exposure — the IRS treats a false response as a false statement on a signed return. The FTX situation is harder: the deduction will likely become available, but the right 2022 answer for most customers is rigorous documentation and patience, not a premature loss claim.