RELATED: The IRS Warns You Could Get Fined for Forgetting This on Your Taxes. On March 18, the IRS issued a new alert warning all taxpayers that they must answer a section about virtual currency on their 2021 tax refund this year, even if they did not deal with any digital transactions. According to the agency, there is a question on the top of all versions of Form 1040 that asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” “All taxpayers filing Form 1040, Form 1040-SR or Form 1040-NR must check one box answering either ‘Yes’ or ‘No’ to the virtual currency question,” the IRS explained. “The question must be answered by all taxpayers, not just taxpayers who engaged in a transaction involving virtual currency in 2021.” According to the IRS, virtual currency is just a digital representation of value that operates like “real” currency, such as coin and paper money. “Virtual currency transactions are taxable by law just like transactions in any other property,” the agency warned. “Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.“ae0fcc31ae342fd3a1346ebb1f342fcb This means you could be penalized for not reporting certain exchanges or payments involving virtual currency. This issue has been causing taxpayers trouble for some time now. The IRS reported in 2019 that it had to mail educational letters to more than 10,000 taxpayers who either failed to report transactions involving virtual currency or reported them incorrectly. “Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution,” the agency warned in an alert that year. RELATED: For more financial advice delivered straight to your inbox, sign up for our daily newsletter. According to the IRS, there are many common transactions in virtual currency that could require taxpayers to check the “Yes” box for the question on their 2021 tax return. This includes if you received virtual currency as a payment for goods or services provided, or even received it for free but it did not “qualify as a bona fide gift.” The exchange of virtual currency might require you to respond “Yes” as well, and this includes an exchange for property, goods, or services, or the exchange or trade of virtual currency for another virtual currency. “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,” the IRS explained. You might be able to mark “No” on your tax return even if you were involved in virtual currency in some way, however. “Taxpayers who merely owned virtual currency at any time in 2021 can check the ‘No’ box when they have not engaged in any transactions involving virtual currency during the year,” the IRS explained. According to the agency, you can also check “No” if your virtual currency activities were limited to certain scenarios. This includes holding digital money in your own wallet or account or transferring it between your own wallets or accounts. You might be excused from reporting your transactions even if you purchased virtual currency as well—if you did so using real currency. That means you’re off the hook for “purchases using real currency electronic platforms such as PayPal and Venmo,” the IRS explained. RELATED: The IRS Now Won’t Let You Do This Until After April 18.
