Cryptocurrency Transactions: What the IRS Wants to Know

March 23, 2022

Cryptocurrency Transactions: What the IRS Wants to Know

Additional IRS scrutiny of cryptocurrency transactions & reporting on 2021 tax returns
As cryptocurrency gains traction and more people incorporate cryptocurrency into their investment portfolio, the IRS is taking notice. Starting with the 2021 Form 1040, the IRS reminds taxpayers that there is a virtual currency question. This question is not new - but starting with tax year 2021, the question has been moved and been placed at the top of Form 1040, Form 1040-SR, and Form 1040-NR.

In its new placement, the IRS asks the following question: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

Not sure if you need to answer the question? You really do. The question must be answered by all taxpayers, regardless of whether you engaged in a transaction involving virtual currency in 2021. To help you determine whether you should answer the question “yes” or “no”, the IRS has published a comprehensive list of frequently asked questions which should answer some questions and help guide you. You can access the FAQs by clicking here

In addition, the IRS recently issued another notice reminding taxpayers of the cryptocurrency reporting requirement. Here are the tips included in the IRS notice:

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 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.

When taxpayers must check “Yes”
The transactions listed below covers the most common type of 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 have disposed of any virtual currency that was held as an investment through a sale, exchange, or transfer, you must check “Yes” and use Form 8949 to figure your capital gain or loss and report it on Schedule D (Form 1040). You will also need to determine whether your transaction is to be treated as either long-term or short-term, which is beyond the scope of this blog.

Finally, if you received any virtual currency as compensation for services or disposed of any virtual currency that may have been 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 (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).

Contact your Herbein tax consultant at if you have questions regarding this topic and its effect on your tax return.

Article prepared by Neil Winter.