Did you know that taxpayers who accepted virtual currency for payments in 2021 for goods or services must answer yes to a question at the top of IRS Form 1040 that reads: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Interestingly, despite the word “currency” in its name, the Internal Revenue Service treats virtual currency as property, and general tax principles applicable to property transactions apply to transactions using virtual currency.
Taxpayers who disposed of any virtual currency that was held as a capital asset through a sale, exchange or transfer, must check “Yes” and use Form 8949 to figure their capital gain or loss and report it on Schedule D (Form 1040). (That’s the same form taxpayers would use to report the sale of shares of stock, for example.)
In a March 18th bulletin, the IRS explains when a taxpayer must check “Yes” to the virtual currency question on Form 1040:
- 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 does not 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;
- 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.
But what about sellers who operate as a business? For example, would a partner in an LLC be required to answer yes, or is there a separate form where the business would have to answer the question?
We ran this question by tax guru Barbara Weltman, author of J.K. Lasser’s Small Business Taxes and publisher of Big Ideas for Small Business. She said there is no place on the partnership return to acknowledge digital asset transactions, but she also said the IRS hasn’t provided instructions stating that partners need to check “yes” on their personal return if their business did transactions in virtual currency.
Larger online marketplaces process payments on behalf of sellers, so this is unlikely to come up as an issue for sellers on eBay, Etsy, or Amazon, when and if those marketplaces begin accepting virtual currency payments from buyers.
Even PayPal’s addition last year of “Checkout with Crypto” puts the payment processor between the buyer and seller (“Eligible users can purchase crypto in the PayPal wallet for as little as $1, and when you check out with crypto, we’ll take care of the sale and conversion of your crypto holdings to cover the purchase.”)
Weltman did note it was important for taxpayers to answer the virtual-currency question on IRS Form 1040, since leaving it blank would delay processing of the return.