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Remember to Report Virtual Currency Transactions on your 1040

March 29, 2022

Did you receive, sell or exchange virtual currency during 2021? If so, you must report this information on your tax return. Here’s what you should know.

Important reminder for virtual currency holders: Be sure to answer the virtual currency question on your 1040. Here’s what you should know.

What is bitcoin/virtual currency?

Bitcoin is a completely digital form of currency. It has grown in popularity for many individuals and businesses in the past few years because it allows for easier and more convenient online transactions. Bitcoin is only one type of virtual currency; there are about 1,500 other known virtual currencies.

What are the tax requirements for virtual currency holders?

U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes, meaning general tax principles that apply to property transactions using virtual currency. This means:

  • Like real estate, the sale or exchange of tokens for other goods is a taxable event
  • Like stockholders, digital currency holders are required to report capital gains and losses from cryptocurrency trades

How do you report virtual currency on 1040?

The virtual-currency question on Form 1040, Form 1040-SR, and Form 1040-NR asks: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

You simply check yes or no to answer.

Check “yes” if:

  • You received virtual currency as payment for goods or services provided;
  • You received or transferred virtual currency for free and not as a bona fide gift;
  • You received new virtual currency for mining and staking activities;
  • You received virtual currency because of a hard fork (A hard fork happens when a cryptocurrency’s existing code is split in two, resulting in a new cryptocurrency)
  • You exchanged virtual currency for property, goods, or services;
  • You exchanged or traded virtual currency for another virtual currency;
  • You sold virtual currency;
  • You disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer. In this scenario, you must use Form 8949 to calculate your gain or loss and report it on Schedule D (Form 1040).

Check “no” if:

  • You owned Bitcoin or virtual currency during 2021 but did not engage in any transactions during the year.
  • You transferred virtual currency between your own wallets or accounts.
  • You bought virtual currency with real currency (this includes PayPal, Venmo and any other real currency electronic platforms).

What are the penalties if you fail to report?

There is a penalty for late payment—0.5% of the unpaid tax amount per month. This starts from the month in which the tax was due. It is capped at 25% of unpaid taxes, but it is still a high figure. There is also a second penalty for late filing—5% of the unpaid taxes for each month starting from the month the tax was due. There would also be interest due on the late payments.

Questions? Contact us.

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