IRS Will Ask About Cryptocurrency Transactions on 2021 Returns
The IRS has made a change to the 1040 tax form for the 2021 tax year. The IRS now asks if a taxpayer has either received, sold, exchanged or disposed of digital currency.
The new question on the 1040 form asks: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
When you sell virtual currency, you must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. So the IRS is mostly interested in knowing if you have made a profit through crypto trading.
If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to that Form 1040 question above.
The 2021 Form 1040 instructions clarify that virtual currency transactions for which you should check the “Yes” box include but are not limited to:
- the receipt of virtual currency as payment for goods or services that you provided;
- the receipt or transfer of virtual currency for free that does not qualify as a bona fide gift under the federal tax rules;
- 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.
Depending on where you live, there may be state income tax implications. You can find more information here.
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There is a very similar question on the 2020 Form. Therefore, I wouldn’t call this a new question. More accurately, it is a slight modification of an old question.