You may have noticed that there is a virtual currency, or “cryptocurrency”, question at the top of your 2021 tax return. It asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” and it requires a response of “Yes” or “No.” If you’ve used or held Bitcoin, Etherium, or other crytocurrencies in 2021, it’s important that you talk to your tax preparer so that your return can be completed correctly.
When you can check “No”
If you owned virtual currency during 2021, you can still check the “No” box if you have not engaged in any transactions involving virtual currency during the year, or their 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.
When you must check “Yes”
The list below covers the most common transactions in virtual currency that require checking the “Yes” box:
- 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 you disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, you must check “Yes” and report your capital gain or loss on Schedule D (Form 1040).
If you received any virtual currency as compensation for services, or disposed of any virtual currency that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type.
Cryptocurrency and its tax treatment can be confusing. If you hold cryptocurrency and are unsure how your position should be treated for tax purposes, please contact our office. We would be happy to help.