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There’s a new cryptocurrency question on IRS Form 1040 that businesses and other taxpayers cannot skip when doing their 2021 federal tax returns, even if they do not own or deal in virtual currencies. 

The new question asks: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Some taxpayers are confused about what the new question means or how to answer if they own cryptocurrencies. 

The upshot is that the IRS treats virtual currency as property; therefore, tax principles that apply to property also apply to cryptocurrencies. 

According to IRS, merely buying virtual currency does not generate a tax liability in a given tax year, nor does holding it as an investment or transferring it between accounts. Taxpayers in this situation should check “no” to the cryptocurrency question. 

However, taxpayers who sold virtual currency they had held as a capital asset during 2021, must check the “yes” box on Form 1040, then use Form 8949 to calculate the capital gain or loss, and report it on Schedule D (Form 1040).  

Similarly, virtual currency that a taxpayer received as compensation for services, or virtual currency sold to customers in a trade or business, must be reported as income in the proper place, such as wages on Form 1040, or on Schedule C – Profit or Loss from Business. 

For more information, see page 17 of the 2021 Form 1040 Instructions and visit the IRS webpage on virtual currencies. 

The IRS is warning taxpayers not to skip the cryptocurrency question on Form 1040 just because they think it doesn’t apply to their own situation. A yes or no answer is required from all taxpayers for their return to be processed.