The IRS Wants to Know about Your Crypto

Davie residents engaging with virtual currencies like Bitcoin, Ethereum, or even Dogecoin—whether you're trading after a day at the Bergeron Rodeo Grounds or from your home office—should be aware that the Internal Revenue Service (IRS) is paying close attention to these digital assets. Starting at the top of Form 1040, right after your name and address, is a question that all taxpayers must answer under penalty of perjury: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

While this question might seem broadly worded, the IRS is primarily interested in "Convertible Virtual Currency" – that is, virtual currency that can be converted into real money or used as a substitute for it. Cryptocurrencies, which use cryptography to secure transactions and operate on decentralized systems, are the most well-known form of convertible virtual currency. Bitcoin is the most widely used, but others include Ethereum, Litecoin, Dogecoin, Tether, and Binance Coin.

For tax purposes, the IRS treats virtual currency as property, not money, similar to how gold or shares of stock are handled. This means certain transactions involving crypto can result in taxable income or loss that must be reported.

You must answer "yes" to the virtual currency question on your Form 1040 if you engaged in any of the following activities:

• You were paid for goods or services in crypto. The fair market value of the crypto received is taxable income.
• You purchased goods or services with crypto, which could result in a taxable gain or deductible loss.
• You sold crypto for real money, leading to capital gains or losses.
• You exchanged or traded crypto for other crypto, which can also result in a taxable gain or loss.
• You acquired more crypto through mining activities, where rewards are considered self-employment income.
• You acquired more crypto through staking activities, earning new crypto similar to interest on a bank deposit.
• You received new crypto through a hard fork, such as an airdrop, which is taxed as ordinary income.
• Any other disposition of a financial interest in virtual currency, including donating crypto to charity (the value at the time of donation is deductible if you itemize).

Conversely, you can answer "no" to the virtual currency question if your only transaction was purchasing virtual currency with real currency. For instance, if you bought a significant amount of crypto but didn't sell or exchange any of it during the year, you would not need to answer "yes." The IRS's focus is on transactions that generate taxable events.

This guidance, based on IRS Form 1040 Instructions (2021) and Frequently Asked Questions on Virtual Currency Transactions, highlights the importance for Davie residents to understand their tax obligations regarding digital assets. Staying informed can help ensure compliance with federal tax regulations.