IRS Requires Yes or No Response to Virtual Currency Question
Last week, the IRS released a reminder that all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency, must answer the virtual currency question at the top of Form 1040, Form 1040-Sr and Form 1040-NR with a yes or no response. The question reads as follows: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Defining Virtual Currency
According to the IRS filing instructions, virtual currency is defined as a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.
Should You Answer Yes or No?
In their March 18th press release, the IRS provided a recap of common transactions to help taxpayers know when to check yes or no.
When taxpayers can respond yes:
Taxpayers will need to respond yes if the following pertains to your situation:
- The receipt of virtual currency as payment for goods or services provided;
- The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift;
- The receipt of new virtual currency as a result of mining and staking activities;
- The receipt of virtual currency as a result of a hard fork;
- An exchange of virtual currency for property, goods, or services;
- An exchange/trade of virtual currency for another virtual currency;
- A sale of virtual currency; and
- Any other disposition of a financial interest in virtual currency.
If a taxpayer disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they must check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).
If a taxpayer received any virtual currency as compensation for services or disposed of any virtual currency that they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040, 1040-SR, or 1040-NR, line 1, or inventory or services from Schedule C on Schedule 1).
When taxpayers can respond 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 their activities were limited to:
- Holding virtual currency in their own wallet or account.
- Transferring virtual currency between their own wallets or accounts.
- Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo.
- Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.
Not certain how to respond?
As always, should you have questions about this topic, or any other topics related to your personal or business situation, please contact us at any time.
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