This year the Internal Revenue Service (IRS) has a question for you this year: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" The agency requires you to answer "Yes" if you did or "No" if you did not.
All taxpayers must answer the virtual currency question on their respective tax form for tax year 2021 whether they dealt in virtual currency or not.
Here's what's behind the question. If you sell or exchange virtual currency or use it to pay for goods or services or hold it as an investment, there may eventually be tax consequences that could result in tax liability.
And the answer to the 2021 IRS virtual currency question isn't as simple as it seems:
- Check the "Yes" box if, in 2021, you engaged in any transaction involving virtual currency except buying and holding.
- A "no" answer applies to everything from not owning virtual currency at all, to buying and holding it, to receiving it as a bona fide gift.
- The IRS reminds all taxpayers that they must answer the virtual currency question on Form 1040, 1040-SR, or 1040-NR for tax year 2021.
- If you sell or exchange virtual currency or use it to pay for goods or services or hold it as an investment, there may eventually be tax consequences that could result in tax liability.
- In general, you should answer "Yes" to the question if in 2021, you engaged in any transaction involving virtual currency as income or a non-bona fide gift.
- You can answer "No" if you either had no virtual currency transactions in 2021, you received virtual currency as a bona fide gift, or your transactions consisted merely of purchasing virtual currency during the year.
- Consult a trusted advisor if you have any questions about the tax consequences of your involvement in virtual currency in 2021.
When to Check 'Yes'
If you disposed of virtual currency you owned and held as a capital asset during 2021, you must check the "yes" box on Form 1040, use Form 8949 to calculate your capital gain or loss, and report it on Schedule D (Form 1040).
Virtual currency you received as compensation for services or virtual currency you held and sold to to customers in a trade or business must be reported as income in the proper place, i.e., as wages on Form 1040, 1040-SR, or 1040-NR, line 1 or on Schedule C (Profit or Loss from Business). Some other common instances in which you must check the "Yes" box in response to the virtual currency question include:
- If you receive virtual currency for free but it does not qualify as a bona fide gift;
- If you receive virtual currency as the result of mining or staking activities;
- If you receive virtual currency as the result of a hard fork;
- If you exchange virtual currency for property, goods, or services;
- If you exchange or trade your virtual currency for another virtual currency; or
- If you dispose of your financial interest in any virtual currency.
When to Check 'No'
If you had no financial interest in—or ownership of—virtual currency during 2021, you can check the "No" box. If you owned virtual currency or acquired it by purchasing it or as a bona fide gift, and did not engage in any transaction, you can check the "No" box also. Other instances that allow you to check the "No" box include:
- Holding virtual currency in your own wallet or account;
- Transferring virtual currency between your own wallets or accounts;
- Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo; or
- Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.
If you are uncertain about the tax consequences of virtual currency, it's always wise to consult a trusted advisor if you had involvement in 2021.
Virtual Currency as Property
To better understand the tax treatment of virtual currency it's important to know how the IRS treats it. Virtual currency is considered property and tax principles that apply to transactions involving property apply to transactions involving virtual currency.
IRS Publication 544, Sales and Other Dispositions of Assets, goes into detail about the disposition and tax treatment of property including:
- How to figure a gain or loss;
- Whether it is ordinary or capital;
- How to treat the gain or loss; and
- How to report a gain or loss.
Since, in most cases, virtual currencies are treated as capital assets, another helpful resource is Frequently Asked Questions on Virtual Currency Transactions. There you will learn how to determine whether your capital gain (or loss) is long-term or short-term, how to determine your basis, and the tax consequences of hard and soft forks.