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:
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