Correctly answer crypto question on tax return
The IRS is trying to out if you had crypto activity when you file your personal 1040 tax return.
You are required to answer the crypto question on your return, and you must answer the question under penalty of perjury. However, answering this question isn’t as simple as it may seem.
Since it’s a broadly worded question, most people assume that any virtual currency transaction requires you to answer with a “yes.”
The IRS has provided guidance regarding the crypto question.
If you purchased virtual currency with real currency, you are not required to answer “yes” to the Form 1040 question. This is confusing because the question asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
The IRS is only trying to uncover virtual currency transactions that create taxable income that is required to be reported on a taxpayer’s tax return.
If you were paid for goods or services in crypto, you are required to answer “yes” because you have earned income and you were paid with crypto.
The fair market value of the crypto received for goods or services is considered to be taxable income by the IRS.
If you paid for goods and services with crypto, you are required to answer “yes” because the transaction would result in a gain if the value of the services is less than your basis in the crypto. The transaction would benefit the taxpayer if it were a loss since this would lower their taxable income.
Selling crypto for real money would require you to answer “yes” to the question.
You would need to answer “yes” to the question if you traded your crypto for other cryptos since this would result in a gain or loss.
You might need to file an amended tax return if you answered the crypto question incorrectly. If you answered “no” when it should have been a “yes” answer and didn’t report your taxable transaction, you need to file an amended return.
If you correct your return before the due date for the return, you can file a superseding return can be filed instead of an amended return. To file a superseding return, you write “SUPERSEDING RETURN” at the top of the first page.
A superseding return is treated as if it was your first return. Consequently, it would provide the benefit of eliminating any risk of accuracy-related penalties.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org