This year, the Internal Revenue Service (IRS) has a question for you: “Did you acquire, sell, swap, or otherwise dispose of any financial interest in any virtual currency at any point during 2021?” The agency expects you to respond “Yes” if you did or “No” if you did not.
Whether they transacted in virtual currency or not, all taxpayers must answer the virtual currency question on their individual tax forms for tax year 2021.
Here’s the reasoning for the query. If you sell or trade virtual money, use it to pay for goods or services, or store it as an investment, there may be tax implications that result in tax liabilities.
And the solution to the 2021 IRS virtual currency issue is not as straightforward as it appears:
- Check the “Yes” box if you used virtual money in any transaction other than purchasing and holding in 2021.
- A “no” response covers anything from not possessing virtual money at all to purchasing and keeping it, as well as receiving it as a genuine gift.
Everyone who submits a Form 1040, Form 1040-SR, or Form 1040-NR is required to answer the question by ticking the relevant box. There are no exceptions.
- The IRS reminds all taxpayers that for tax year 2021, they must answer the virtual currency question on Form 1040, 1040-SR, or 1040-NR.
- If you sell or trade virtual money, use it to pay for goods or services, or store it as an investment, there may be tax implications that result in tax liabilities.
- In principle, you should respond “Yes” if you participated in any transaction using virtual money as revenue or a non-bona fide gift in 2021.
- If you had no virtual currency transactions in 2021, got virtual money as a genuine gift, or your transactions consisted only of acquiring virtual currency over the year, you may respond “No.”
- If you have any doubts concerning the tax implications of your engagement with virtual currency in 2021, consult a trustworthy adviser.
When to Check ‘Yes’
If you sold virtual currency that you owned and held as a capital asset in 2021, you must select the “yes” box on Form 1040, calculate your capital gain or loss on Form 8949, and report it on Schedule D. (Form 1040).
Virtual money received in exchange for services or virtual currency kept and sold to clients in a trade or company must be reported as income in the appropriate area, i.e., as wages on Form 1040, 1040-SR, or 1040-NR, line 1 or Schedule C. (Profit or Loss from Business).Other typical situations in which you must choose “Yes” in answer to the virtual currency inquiry include:
- If you obtain virtual cash for free yet it is not a genuine gift;
- If you get virtual cash as a consequence of mining or staking;
- If you get virtual money as a consequence of a hard fork;
- If you trade virtual money for real estate, products, or services;
- If you sell or swap your virtual money for another virtual currency; or
- If you sell your financial stake in any virtual currency.
When to Check ‘No’
Check the “No” box if you have no financial interest in or ownership of virtual currency in 2021. You may also tick the “No” option if you possessed virtual money or received it as a legitimate gift and did not participate in any transactions. Other situations in which you may tick the “No” option include:
- Having your own virtual money wallet or account;
- Transferring virtual cash from one wallet or account to another;
- Purchasing virtual currency with real money, including transactions made using real-money electronic platforms such as PayPal and Venmo; or
- Holding, transferring, or acquiring virtual money in the manner stated above.
If you are unsure about the tax implications of virtual currency, it is always a good idea to seek a trustworthy professional if you were involved in 2021.
Virtual Currency as Property
To properly grasp the tax status of virtual money, it is necessary to first understand how the IRS handles it. Virtual money is considered property, therefore tax considerations that apply to real transactions also apply to virtual currency transactions.
IRS Publication 544, Sales and Other Dispositions of Assets, discusses the disposal and tax treatment of property in depth, including:
- How to figure a gain or loss;
- Whether it is common or capital;
- How to handle a gain or loss; and
- How to report a gain or loss.
Because virtual currencies are often recognized as capital assets, Frequently Asked Questions on Virtual Currency Transactions is another useful resource. There, you’ll discover how to tell whether your capital gain (or loss) is long-term or short-term, how to calculate your basis, and the tax implications of hard and soft forks.
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