updated 2:11 PM CET, Oct 31, 2023

IRS reminder: Don't forget to report 'virtual currency transactions' on 2021 returns

The IRS has formally reminded U.S. taxpayers not to ignore a virtual currency question at the top of the tax returns they're currently preparing to file, for the 2021 tax year.

The question, which may be viewed on the 1040 form above, just inches from the top (and which is also on the forms 1040-SR and 1040-NR), asks: "At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?"

According to the IRS, all taxpayers need to answer this question, "not just taxpayers who engaged in a transaction involving virtual currency in 2021."

In a reminder which may be viewed on the IRS's website, the tax authority says taxpayers are allowed to check the "no" box if they "merely owned virtual currency at any time in 2021" but didn't engage in any "transactions" involving this virtual currency during the tax year, or if their activities were limited to:

    *   Holding virtual currency in their own wallet or account

    *  Transferring virtual currency between their own wallets or accounts

    *  Purchasing virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo

    *  Engaging in a combination of holding, transferring, or purchasing virtual currency as described above.

Taxpayers would need to check the "yes" box, though, if any of their virtual currency transactions during the year involved: 

    *  The receipt of virtual currency as payment for goods or services provided

    *  The receipt or transfer of virtual currency for free (without providing any consideration) that wouldn't qualify as a bona fide gift

    *  The receipt of new virtual currency, as a result of mining and staking activities

    *  The receipt of virtual currency as a result of a "hard fork" (blockchain-speak for a major change in a network's protocol that requires users to upgrade to a later version of the relevant software)

    *  An exchange of virtual currency for property, goods, or services

    *  An exchange/trade of virtual currency for another virtual currency

    *  A sale of virtual currency; and

    *  Any other disposition of a financial interest in virtual currency.

And if, during the year, a taxpayer "disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, they must check 'yes' and use Form 8949 to figure their capital gain or loss, and report it on Schedule D (Form 1040)," the IRS says, in its notice.

"If a taxpayer received any virtual currency as compensation for services or disposed of any virtual currency that they held for sale to customers in a trade or business, they must report the income as they would report other income of the same type (for example, W-2 wages on Form 1040, 1040-SR, or 1040-NR, line 1, or inventory or services from Schedule C on Schedule 1)."

More information, the IRS concludes in its notice, may be found on page 17 of the 2021 Form 1040 Instructions PDF, and/or on an special IRS website page devoted to the topic of virtual currencies, here.