IRS reminds taxpayers they must check a box on Form 1040, 1040-SR or 1040-NR on virtual currency transactions for 2021

The IRS reminds taxpayers that there is a virtual currency question at the top of Form 1040, Form 1040-SR and Form 1040-NR. It asks: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

All taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either “Yes” or “No” to the virtual currency question. The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021.

When taxpayers can check “No”

Taxpayers who merely owned virtual currency at any time in 2021 can check the “No” box when they have not engaged in any transactions involving virtual currency during the year, or their activities were limited to:

• Holding virtual currency in their own wallet or account.
• Transferring virtual currency between their own 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.

When taxpayers must check “Yes”

The list below covers the most common transactions in virtual currency that require checking the “Yes” box:

• 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 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.

If a taxpayer disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they must check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040).

If a taxpayer received any virtual currency as compensation for services or disposed of any virtual currency that they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040, 1040-SR, or 1040-NR, line 1, or inventory or services from Schedule C on Schedule 1).

For more information, see page 17 of the 2021 Form 1040 Instructions PDF and visit Virtual Currencies for general information on virtual currency and other related resources.

Source: IR-2022-61, March 18, 2022