Psst! The IRS Has a Virtual Currency Tax Question for You

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On March 18, the IRS sent out a reminder to all taxpayers that there is a question regarding virtual currency at the top of the tax returns they will file this year. The question asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

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The question must be answered with a “yes” or “no” by all taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR, even if they have not engaged in any transactions involving virtual currency during the year.

You should answer “no” if you have not engaged in any transactions involving virtual currency during the 2021 tax year, according to the IRS, or if your activities were limited to:

  • 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.
  • Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.
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The following list covers the most common transactions in virtual currency that require checking the “yes” box on your 1040 forms, per the IRS:

  • 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.
  • 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.

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Learn: Bitcoin and Crypto Taxes in 2022: What You Need To Know
Explore: Lawmakers Introduce Bill To Improve Crypto Tax Laws — Here’s How It Would Make Life Easier for Consumers

Crypto is becoming more and more commonplace as time goes by, and the IRS is showing increased interest in its use and trade. The IRS reported in 2019 that it had to mail educational letters to more than 10,000 taxpayers who either failed to report transactions involving virtual currency or reported them incorrectly, per BestLife. “Virtual currency transactions are taxable by law just like transactions in any other property,” the agency warned. “Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.”

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
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