Gotcha! How One Simple Tax Question Could Catch out Crypto Holders

It’s a simple yes or no answer: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

And it’s considered “a gotcha question,” according to Eric Bronnenkant CFP, CPA, and head of tax at Betterment. He says this because so many people have bought crypto without necessarily understanding the tax implications.

And, of course, if you answer in the negative, and the Internal Revenue Service (IRS) finds you have made a gain or loss, you could face penalties.

Source: irs.gov

The IRS clarified last year that if transactions involving virtual currency during 2020 were made with fiat currency investors are not required to answer yes to the Form 1040 question.

So when should you respond no? Shaun Hunley, a tax consultant at Thomson Reuters  told CNET: “If you’re just purchasing cryptocurrency with US dollars, and that’s all you do during the year – you don’t sell it, you don’t exchange it, you just keep it in your wallet for the whole year –you can check no on that question.”

Sale must be declared to establish if tax is due

On the other hand, selling any crypto should be reported on Schedule D (Form 1040) to establish whether a gain or a loss has been realized.

“Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your federal income tax return in U.S. dollars,” advises the IRS.

The report also reminds taxpayers that trading one crypto for another is also a taxable event.

And anyone who received $10,000 or more in one transaction last year will also need to take extra steps as the 2022 tax deadline approaches. 

“If you received at least a $10,000 value in bitcoin or other digital assets in a single transaction, or in related transactions, then you must report it using an 8300 form (PDF) within 15 days,” Hunley warns.

Failure to report transactions is considered a felony. The deadline for filing U.S. tax returns is April 18.

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Source: https://beincrypto.com/gotcha-how-one-simple-tax-question-could-catch-out-crypto-holders/