Skip to Content
How to answer the cryptocurrency question correctly on your tax return
© Nitiphon Yudram |

Be careful how you answer that cryptocurrency question on your tax return

Filing your federal taxes can be a relatively complex endeavor. Thankfully you don’t have to verify your identity through a third party anymore, but other pitfalls can make it difficult.

One such issue can arise from cryptocurrency, and depending on how you used it over the last year, you could find yourself in trouble with the IRS. The various digital currencies have exploded in popularity, and the IRS wants to know if you’ve been trading them.

Read on for the one cryptocurrency question on your tax return that you need to answer correctly.

Here’s the backstory

Your tax return might look similar to previous years, but one added line is crucial for accurate financial declaration. Just below the section for your personal information on Form 1040, Form 1040-SR and Form 1040-NR, there is a question about whether you dealt in crypto.

It reads: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” It might seem like a simple yes or no question, but there can be severe consequences if you aren’t truthful.

“If you check yes, you’re flagging yourself, and the IRS is going to be looking for some sort of capital gain or loss on your Schedule D,” financial analyst Tommy Lucas told CNBC.

How to handle cryptocurrency when filing taxes

The IRS warns that all taxpayers must answer the question, not just those who hold cryptocurrency. However, depending on your situation, there are a few reasons why it should be safe to tick the no box.

According to the IRS, you can check “No” if you merely owned virtual currency at any time in 2021 but didn’t engage in transactions. You can also click “No” if your activities were limited to:

  • Holding virtual currency in your wallet or account.
  • Transferring virtual currency between your 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.

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.
  • 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 financial interest in virtual currency.

The IRS outlines that anyone who disposed of crypto “that was held as a capital asset” must report any capital gain or loss on Schedule D (Form 1040). If you don’t, the IRS can prosecute you under penalties of perjury.

The crypto world can be complex, but it doesn’t need to be. An excellent place to start is to get a copy of Kim’s eBook Cryptocurrency 101: The Beginners Guide for buying, selling and spending the safe way.

She dives into the basics, goes through your options for buying and storing digital currency, and gives you pro tips to keep you safe from hackers and scammers.

Keep reading

It’s tax time: 4 free and paid software options to file your return online

Doing your taxes? This is the easiest way to scan all your invoices and receipts

Ask me your digital question!

Navigating the digital world can be intimidating and sometimes downright daunting. Let me help! Reach out today to ask your digital question. You might even be on my show!

Ask Me