Tax-saving tips: The IRS wants to know about your crypto

Cryptocurrency, such as Bitcoin, is all the rage these days. Crypto is not legal money. It is property, similar to gold. Like gold, its use can result in taxable income.

The IRS is concerned that you and millions of Americans are using crypto without paying tax on the earnings. To clarify, it expects you and other taxpayers to report crypto earnings, the IRS added the following question about cryptocurrency to the top of Form 1040:

At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?

You must answer this question under penalty of perjury, even if you have never heard of Bitcoin and don't know what cryptocurrency is. You can't leave the field blank.

Unfortunately, this is something of a trick question. It is so broadly worded; you'd think any transaction involving digital currency requires a "yes" answer. But that is not the case. IRS guidance makes clear that it is interested only in virtual currency transactions that result in taxable income (or loss) that must be reported on a taxpayer's return.

For example, if you simply purchased Bitcoin during the year and held on to it, you should answer "no" to the crypto question. The same goes if you received crypto as a gift, or transferred crypto from one wallet to another.

You should answer "yes" to the crypto question if you purchased or sold goods or services with crypto, received new crypto through mining or staking activities, exchanged crypto for dollars or other crypto, or got new crypto from a hard fork. All these activities result in taxable income (or loss).

What should you do if you answered the crypto question wrong?

If you answered the crypto question "yes" when you should have answered "no," you don't have to do anything. There is no need to amend your tax return.

On the other hand, if you answered "no" when it should have been "yes" and you did not report your taxable virtual currency transactions, you need to file an amended or superseding return. If you fail to do so, you may get a letter from the IRS advising you to file an amended return and pay any taxes due.

The IRS began sending out such letters in 2019.

Jay Thompson is the president of Golden Empire Services LLC and a Business Consultant with the CSU Bakersfield Small Business Development Center. The CSUB SBDC provides premium, one on one, no cost consulting to small business owners in Kern, Inyo and Mono Counties. For more information visit their website at http://www.csubsbdc.com.