IRS Wants To Know Your Crypto Transactions This Tax Season

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Tax season is fast approaching – and the IRS has an eye on crypto investors.

Form 1040, which U.S. taxpayers use to file annual tax returns, has a question about “virtual currency” at the top of the first page.

Investors must report taxable 2021 transactions involving bitcoin, ethereum, dogecoin, and other cryptocurrencies to the federal government.

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These transactions include obtaining crypto compensation, rewards for mining crypto, or free coins via “Airdrops” or “hard forks” (when a cryptocurrency splits into multiple branches and creates a new coin), according to Shehan Chandrasekera, accountant and tax chief. at CoinTracker.

Converting crypto to cash, purchasing goods or services with it, and converting from one coin to another are also eligible, he said.

Asking questions about crypto transactions is nothing new, but the IRS has placed more emphasis on these tax returns in recent years.

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The move comes as the White House and Democratic lawmakers aim to crack down on tax fraud. The crypto-economy contributes to what is known as the tax gap via lax reporting requirements that help facilitate tax evasion, according to a report from the U.S. Department of the Treasury released earlier this year.

A new, bipartisan, $ 1.2 trillion infrastructure law requires annual tax reporting by digital currency brokers starting in 2023.

It is also due to the fact that cryptocurrencies have become more popular among investors. Tesla CEO and crypto enthusiast Elon Musk said this week that the automaker will accept dogecoin as a form of payment for some of its merchandise.

“[The IRS] is trying to capture tax revenue in this growing market, ”Chandrasekera said. “Every year there is a new wave of people entering crypto who think it is untaxed.

The IRS first explicitly asked taxpayers about their crypto transactions for 2019 taxes. However, it asked the question on a Schedule 1 form, which not all taxpayers use. (This form reports certain types of income, such as unemployment benefits or rental income, that do not appear on the 1040 principal.)

The following year, the IRS brought the crypto issue to the fore on the 1040 – where it remained for the 2021 tax year.

However, the 2021 question is worded differently than it was for 2020. She asks taxpayers, “At any time in 2021, have you received, sold, traded or otherwise disposed of any financial interest in a virtual currency?” ? “

Last year’s wording encompassed some tax-free transactions, like simply holding crypto or sending funds from one digital wallet to another, Chandrasekera said. The change in wording results in a smaller set of transactions, he said.

“This year the question is only about things that could lead to taxable events,” he said.

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