Reader Beware: This post is not intended to answer all questions regarding virtual currency or provide tax advice. If your only activity was holding virtual currency or transferring it between your own accounts in 2020, it does not qualify as a “transaction” for tax purposes and taxpayers can check the “no” box. Additional tax, penalties and interest could be assessed if it is determined you have a taxable virtual currency transaction you failed to report. Remember you are signing your tax return under penalty of perjury and are stating that to the best of your knowledge and belief, it is true, correct, and complete. Make sure you familiarize yourself with the rules or seek the advice of a tax professional. A disposition of a financial interest in virtual currency.Ī transaction involving virtual currency does not include the holding of virtual currency in a wallet or account or transferring virtual currency from one wallet or account you own or control to another that you own or control.An exchange of virtual currency for other property, including for another virtual currency and.An exchange of virtual currency for goods or services.The receipt or transfer of virtual currency for free (without providing any consideration).The instructions define a “transaction” involving virtual currency as including but not limited to: The IRS is not seeking information from taxpayers that do not have taxable transactions. If your only transactions involving virtual currency during 2020 were purchases of virtual currency, you are not required to answer yes to the 1040 question. Must I answer yes to the 1040 question? (3/2021)Ī5: No. During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Q5: The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. At the urging of my office, the IRS provided additional guidance by way of a frequently asked question (FAQ) to clarify the use of the term “acquire.” The FAQ states: The IRS instructions for the Form 1040 provide clarity and explain, “If, in 2020, you engaged in any “transaction” involving virtual currency, check the “yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.” Purchase of goods or services with Apple Pay, Google Pay, Cashapp, Venmo, or PayPal using real currency are not considered virtual currency. And there is confusion with the word “acquire” in the wording of the question and the instructions. In answering that question, you will have to ask yourself a threshold question: At any time during 2020 did I own virtual currency, which includes all cryptocurrencies? If the answer to that question is yes, then you must ask yourself several other questions including: Have I paid for goods or services with virtual currency? Did I receive virtual currency in exchange for goods or services? Did I sell virtual currency during 2020? Do I have records documenting all of my purchases, sales, and exchanges? Did I report all my sales and exchanges and calculate my gain or loss resulting from the increase or decrease in value of my virtual currency? Do I report my gains and losses as short-term or long-term capital gains or losses? What records should I maintain? Well, you are not alone in asking those questions. No one should take this question lightly. Individual Income Tax Return, you will be asked: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” In response, you must check the box “yes” or “no” before your return will be accepted for electronic submission. Are you one of those early birds who has already sat down to prepare your 2020 tax return? Notice anything different right under your name and address? This year, near the top of Form 1040, U.S.
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