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| It's Sunday, which means time for another special tax season edition of The Daily Money. I'm Susan Tompor and I'm here to bring you up to speed about cryptocurrency and taxes. |
| You can't avoid virtual currency on your 2021 federal income tax return – even if the closest you came to bitcoin last year was listening to your brother-in-law brag about all the money he made. |
| The front of the 1040 form, above the section for providing information on dependents, asks: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?" |
| Yes or No. |
| And the IRS wants an answer. |
| "Do not leave this field blank," according to an IRS alert called "What's New" in the instruction booklet for the latest tax season. "The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency." |
| Who should answer yes? |
| "Taxpayers who sell crypto, get paid in crypto for services, mining, airdrops, staking," said Kirk Phillips, chair of the AICPA Virtual Currency Task Force. |
| As its mainstream appeal grows, investing in the highly volatile virtual currency market isn't for the fainthearted. And calculating the taxes on what you owe isn't for those who want a simple and easy tax return. |
| You should track transactions using some type of crypto tax software, Phillips said. "Keep memos for special events like IDOs (token generation events)," as well, he said. |
| Austin Woodward, CEO of TaxBit, which provides accounting software for the tokenized economy, said people would be better served by thinking of virtual currency holdings as "crypto-property" in the eyes of the IRS. |
| "This is not just 'buy', 'hold', 'sell', like it is in the equity world," Woodward said. |
| The reality is people are exchanging one virtual currency for another all the time -- and that triggers taxable events. Just because you didn't cash out doesn't mean you've avoided a taxable transaction. |
| Many more taxpayers are likely to be receiving a 1099-MISC to report a trader's crypto rewards or staking. Such a form can give the IRS a clue that a taxpayer is actively involved in crypto. |
| The IRS notes that a transaction involving virtual currency includes, but is not limited to: |
| • | Receiving bitcoin or other virtual currency as a payment for goods or services | | • | Receiving new virtual currency as a result of mining and staking activities. | | • | Receiving virtual currency as a result of a hard fork, or when a single cryptocurrency splits into two. | | • | An exchange of virtual currency for property, goods or services. | |
| Until next Sunday, Daily Money subscribers. Thanks for reading. |
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