Form 1040 Virtual Currency Question
Although most 2021 tax returns have already been filed, and even though the IRS may change it in the future, it may be appropriate to review the virtual currency question at the top of Form 1040, Form 1040-SR and Form 1040-NR: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
All taxpayers filing these forms must check one box, answering either “Yes” or “No” to the virtual currency question.
When Taxpayers Can Check “No”
Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box when they have not engaged in any transactions involving virtual currency during the year, or when their activities were limited to:
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Holding virtual currency in their own wallet or account;
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Transferring virtual currency between their own wallets or accounts;
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Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo; and
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Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.
When Taxpayers Must Check “Yes”
Below are the most common virtual currency transactions that require checking the “Yes” box:
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The receipt of virtual currency as payment for goods or services provided;
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The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
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The receipt of new virtual currency as a result of mining and staking activities;
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The receipt of virtual currency as a result of a hard fork;
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An exchange of virtual currency for property, goods, or services;
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An exchange/trade of virtual currency for another virtual currency;
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A sale of virtual currency; and
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Any other disposition of a financial interest in virtual currency.
Taxpayers who disposed of any virtual currency held as a capital asset through a sale, exchange or transfer must check “Yes,” and use Form 8949 to figure their capital gain or loss and report it on Schedule D.
Taxpayers who received virtual currency as compensation for services, or who disposed of virtual currency that they held for sale to customers in a trade or business, must report the income as they would report other income of the same type.