What you need to know about the IRS crypto question on tax returns

There's a lot of talk about cryptocurrency investors and tax compliance, but a yes or no question can be surprisingly substantial. IRS Asks Everyone About crypto Transactions. A variation of this seemingly innocuous question appears at the top of Forms 1040Personal Income Tax Declaration; 1040-SR, US Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return, and was revised for 2023 returns to update wording. The question was also added to these forms: Forms 1041United States Income Tax Return for Estates and Trusts; 1065US Corporate Income Statement; 1120, US Corporate Income Tax Return; and 1120SUS income tax return for an S corporation.

The IRS asks this question with variations for corporations, partnerships, estates, and trusts:

“At some time during 2023, you: (a) received (as a reward, prize or payment for property or services); or (b) sell, exchange or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Yes or no?

For digital assets, the IRS half “a digital representation of value recorded on a cryptographically secure distributed ledger or similar technology. If a particular asset has characteristics of a digital asset, it is treated as such for federal income tax purposes. Examples of digital assets: convertible virtual currency and cryptocurrency, stablecoins, non-fungible tokens (nft).”

Are No You are supposed to leave it blank, and everyone filing Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120, and 1120S must check a box and answer “Yes” or “No.” In addition to checking the box, you must declare all income related to digital asset transactions. Therefore, an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2023 must use Form 8949Sales and other Disposals of Capital Assets, to calculate your capital gain or loss on the transaction and then report it in Schedule D (Form 1040), Capital Gains and Losses. A taxpayer who donated a digital asset may be required to file a return Model 709United States gift (and generation-skipping transfer) tax return.

So does the yes or no question really matter? It doesn't ask for numbers or details, although if you sold some, you must include them elsewhere on your tax return. Since the IRS classified cryptocurrencies as property a decade ago, any sale should result in a profit or loss. Maybe the IRS is just investigating who uses cryptocurrency, can you guess? Not necessarily, and a simple yes or no can be important.

It sounds similar to the question about foreign accounts included on Schedule B of Form 1040. The question could result in large penalties or even perjury for checking the wrong box. If you answer “no” and it is later discovered that you have transacted cryptocurrency during the year, the fact that you explicitly answered no to this new question (under penalty of perjury) could be used against you.

We learned this with foreign bank accounts. In that context, the Department of Justice's Tax Division successfully argued that simply failing to check a box related to reporting foreign accounts is per se willfulness. Intentional failures carry higher penalties and a greater threat of criminal investigation. The IRS Criminal Investigation Division has met with tax authorities in other countries to share data and law enforcement strategies to find possible cryptocurrency tax evasion.

This might suggest that it's safest to check yes, right? But what if you don't know if you can fairly say that you were the one who made the transactions? What if you are acting on behalf of your company and not personally? Or, less formally, what if you simply have a kind of “signing authority” over cryptocurrencies owned by your parents or other non-computer-savvy relatives? That way, you can help them manage their cryptocurrencies.

If you sell your parents' cryptocurrencies on their behalf, at their request and/or for their benefit, should you answer “yes” or “no” to the question? Either way, should you attach an explanatory statement to the statement explaining your relationship to the statement's virtual currency? There are probably no perfect answers to these questions. The IRS has said that you have a financial interest in a digital asset if you are the record owner of a digital asset or have an ownership interest in an account containing one or more digital assets, including the rights and obligations to acquire an interest. financial, or owns a wallet containing digital assets.

But fortunately, the IRS has also said that the following actions or transactions in 2023, by themselves, generally do not require you to check “Yes”:

• Hold a digital asset in a wallet or account;
• Transfer a digital asset from one wallet or account that you own or control to another wallet or account that you own or control;
• Buy digital assets using US currency or other real currency, including through the use of electronic platforms such as PayPal and Venmo.

The IRS says don't leave questions unanswered; answer yes or no.” More information about cryptocurrency transactions is on the IRS page. Frequent questions Web page. What is clear is that answering “no” if the truth is “yes” is a big mistake. Skipping boxes completely may not be so bad, but it's not good either. If the truth is “yes,” say so and remember to disclose and report your income, profits, losses, etc. Maybe that's the point of the question, as a salient reminder.

If this makes you realize that you forgot to report your crypto earnings in previous years, consider modifying it to fix it. Don't wait for the IRS to find you, even if you didn't receive one of those 10,000 IRS crypto warning letters. Five years ago, the IRS sent letters to 10,000 crypto taxpayers, and even if it did No receive one of those crypto-use-even-if-you-dont-receive-one-heres-what-to-do/” target=”_blank” rel=”noopener”>10,000 letters from the IRSYou may want to dust off your old tax returns and consider modifying your taxes.

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