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1040 Virtual Currency Question

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:

Mark Castro, CPA

Mark Castro, CPA

Mark has been with CrossLink Professional Tax Solutions (CPTS) since 2008, but has been in the tax industry since 1990. As the government/tax industry liaison for CPTS, Mark has been very active in working with the IRS, States, and other tax industry members to help improve communications, promote standardization, and simplification of eFile systems. Mark has also been active with industry associations as a board member of the National Association of Computerized Processors (NACTP) and the Council of Electronic Revenue Communication Advancement (CERCA) for many years. These two associations work with the IRS and States to help solve key eFile and electronic tax system issues and work to improve the operations of the State and IRS eFile systems.
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Recent Tax Updates