The IRS is continuing its effort to inform taxpayers that virtual currency is considered property for federal tax purposes. If an individual uses virtual currency to purchase goods and services, this is considered a taxable transaction and must be reported on their federal tax return – usually as a capital transaction of Schedule D.
How to Report Virtual Currency on a Tax Return
In order to make taxpayers aware that virtual currency is considered property for federal tax purposes, the IRS requires all taxpayers to answer the following virtual currency question on page 1 of the 2021 Form 1040:
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
This question should be answered “Yes” if the individual had the following virtual currency transactions (not limited to):
- 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 service
- An exchange/trade of virtual currency for another virtual currency
- A sale of virtual currency
- Any other disposition of a financial interest in virtual currency
This question should be answered “No” in the following circumstances:
- The individual did not have any transactions involving virtual currency during 2021.
- The individual’s only transactions during 2021 involved holding virtual currency in a wallet or account.
- The individual’s transactions only involved the transfer of virtual currency from one wallet or account the individual owned or controlled to another they owned or controlled.
- The individual’s only transaction involving virtual currency were purchases of virtual currency for real currency, including the use of real currency electronic platforms such as PayPal or Venmo.
If an individual answers the virtual currency question “Yes”, their transactions will need to be correctly reported on their 2021 federal tax return as follows:
- On Form 8949 to figure the capital gain or loss on any virtual currency that the individual disposed of during the year.
- On Form 1040, line 1, if the individual received virtual currency as compensation for services.
- On Schedule C, if the individual received virtual currency, they received for sale of goods and services to customers in a trade or business
Virtual Currency FAQs and Resources
By Mark Castro, CPA
For more details on how to report Virtual Currency Transactions see the following on the IRS website:
- Frequently Asked Questions on Virtual Currency Transactions
- Virtual Currency page
- IRS news article of March 23, 2018 – IRS reminds taxpayers to report virtual currency transactions
- IRS Notice 2014=-21 – Includes additional FAQs on virtual currency transactions and the tax treatment of them
