Reporting Virtual Currency Transactions


Virtual currency is everywhere these days – on the news, in sports-betting commercials, on your
tax documents. Yes, on your tax documents. In case you haven’t heard, the IRS now requires
taxpayers to report transaction activity related to virtual currency. They want to know who is
trading virtual assets and the related income that’s being generated.
All individual taxpayers now must check one box on their tax return answering either “Yes” or
“No” to the question about engaging in transactions involving virtual currency. That’s it. Just
answer the question. But how do you know the correct answer? The IRS recently came out with
some guidance, just in time for tax filing season.
When Taxpayers Can Check “No”
Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box, as
long as they have not engaged in any virtual currency transactions during the year. Virtual
currency activities must be limited to holding virtual currency in their own wallet or account;
transferring virtual currency between their own wallets or accounts; purchasing virtual currency;
and engaging in a combination of holding, transferring, or purchasing virtual currency.
When Taxpayers Must Check “Yes”
Here is a list of the most common transactions in virtual currency that require checking the “Yes”
box:
● Receipt of virtual currency as payment for goods or services
● Receipt or transfer of virtual currency for free (without providing any consideration) that
does not qualify as a bona fide gift
● Receipt of new virtual currency as a result of mining and staking activities
● Receipt of virtual currency as a result of a hard fork
● Exchange of virtual currency for property, goods, or services
● Exchange/trade of virtual currency for another virtual currency
● Sales of virtual currency; and
● Any other method of disposing of a financial interest in virtual currency.
Virtual currency is considered to be property under tax law. If you dispose of any virtual
currency through a sale, exchange, or transfer, you are not done reporting by simply checking the
“Yes” box. You must and use Form 8949 to figure the capital gain or loss related to the sale and
report it on Schedule D, Capital Gains and Losses.
Want more information on when and how to report virtual currency activity? Check out page 17
of the 2021 Form 1040 Instructions and visit
https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies for other
resources.