Bitcoin and other cryptocurrencies are popular but not considered legal money. Instead, they’re treated as property, similar to gold.
The IRS is concerned that taxpayers are not reporting their cryptocurrency earnings and has added a question about crypto to the top of Form 1040.
QUESTION: During 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?
You must answer this under penalty of perjury, even if you have never heard of bitcoin and don’t know what cryptocurrency is.
Whether a digital currency transaction requires a “yes” answer is unclear.
The IRS guidance clarifies that the agency is interested in virtual currency transactions that result in taxable income.
Your answer should be “NO” if:
- You purchased bitcoin during the year and held on to it,
The same goes for receiving crypto as a gift or transferring crypto from one wallet to another.
Your answer should be “YES” if:
- You purchased or sold goods or services with crypto,
- Received new crypto through mining or staking activities,
- Exchanged crypto for dollars or another crypto, or got new crypto from a hard fork.
All these activities result in taxable income (or loss).
What should you do if you answered the crypto question wrong?
There is no need to amend your tax return if you accidentally responded “yes” to a crypto question on your tax return.
But, you need to file an amended or superseding return if you answered “no” when it should have been “yes” and did not report your taxable virtual currency transactions. If you fail to do so, you may get a letter from the IRS advising you to file an amended return and pay any taxes.
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