Wondering whether you need to answer ‘Yes’ to the crypto tax question on Form 1040?
In this guide, we’ll break down everything you need to know about the cryptocurrency question on Form 1040. We’ll break down when investors need to answer ‘Yes’, explore the potential tax ramifications of answering the question, and discuss the next steps you should take when it comes to filing your taxes.
The crypto tax question for 2022
This year, the crypto tax question reads the following:
“At any time during 2022, did you (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
When must you answer ‘Yes’ to the 1040 virtual currency question?
You must answer yes to the virtual currency question if you conducted one or more of the following transactions in 2022:
- Received crypto for free or for payment for goods or services provided
- Received crypto from an airdrop, hard fork, mining or staking
- Sold crypto for fiat currency (like USD)
- Exchanged one crypto for another
- Exchanged cryptocurrency for property, goods or services
- Gifted crypto to a friend or family member
Keep in mind, just because you select ‘Yes’ to the virtual currency tax question, does not necessarily mean you owe taxes on your crypto.
For a complete breakdown of how cryptocurrency taxes work and when you do or do not owe taxes, check out our Complete Crypto Tax Guide.
When can you answer ‘No’ to the 1040 virtual currency question?
You do not need to check ‘Yes’ to the virtual currency question if in 2022 you only:
- purchased cryptocurrency
- held cryptocurrency in wallets or accounts
- transferred crypto between self-owned or self-controlledwallets or accounts
In other words, if you simply held your cryptocurrency and did not make any sales or earn any crypto income during the 2022 tax year, you do not need to answer ‘Yes’ to the Form 1040 question.
However, you should check ‘Yes’ if you’ve gifted crypto to a friend or family member. While this is not typically a taxable transaction, it’s likely that the IRS wants to track this information in case of future disposals (gifting can be subject to gift tax if the value exceeds certain thresholds).
For more information, check out our guide to crypto gift taxes.
Why does the IRS ask if you own crypto?
Some investors feel nervous about answering ‘Yes’ to the 1040 question because they are afraid that it may increase the likelihood of a tax audit.
It’s likely that these fears are unfounded. At this time, tax experts say that the IRS is asking this question to better understand how many Americans are actively transacting in cryptocurrency. There’s no evidence that answering ‘Yes’ could potentially lead to an audit.
On the other hand, answering ‘No’ to the question when the taxpayer has relevant crypto transactions for the year could be considered tax fraud and lead to criminal penalties.
What are the next steps after answering ‘Yes’ to the Form 1040 question?
Once you answer ‘Yes’ on the cryptocurrency tax question on Form 1040, you should report all of your taxable cryptocurrency transactions on your tax return.
Typically, cryptocurrency disposals need to be reported on Form 8949, and summarized on Schedule D. Income events are generally reported on Schedule 1 Form 1040.
For more information, check out our guide to reporting crypto on your tax return.
What are the next steps after answering ‘Yes’ to the Form 1040 question?
Once you answer ‘Yes’ on the cryptocurrency tax question on Form 1040, you should report all of your taxable cryptocurrency transactions on your tax return.
Typically, cryptocurrency disposals need to be reported on Form 8949, and summarized on Schedule D. Income events are generally reported on Schedule 1 Form 1040.
For more information, check out our guide to reporting cryptocurrency on your taxes.
File your crypto taxes today!
Crypto tax software like CoinLedger can make filing your taxes easier than ever.
With CoinLedger, you can automatically pull in transactions from exchanges like Coinbase and blockchains like Ethereum. Once you’re done uploading your transactions, you can generate a free tax report with the click of a button.
Get started with a free account today.
Frequently asked questions
FAQs
On your 2023 federal tax returns, you must answer "Yes" or "No" to a digital asset question: At any time during 2023, did you: (a) receive (as a reward, award 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)?
What is the crypto question on the 1040 form? ›
The Form 1040 now asks, “At any time during 2023, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” The IRS added this question to remove any doubt about whether cryptocurrency activity is taxable.
How do I report crypto on taxes 2023? ›
For example, an investor who held a digital asset as a capital asset and sold, exchanged or transferred it during 2023 must use Form 8949, Sales and other Dispositions of Capital Assets, to figure their capital gain or loss on the transaction and then report it on Schedule D (Form 1040), Capital Gains and Losses.
How does the IRS know you have crypto? ›
Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them.
What is the new IRS question that must be answered? ›
”At any time during 2023, did you: (a) receive (as a reward, award 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)?”
Did you receive exchange or sell any digital assets? ›
All taxpayers must answer the question. If they answer "yes," then they must report all income related to digital asset transactions, including any that were sold, exchanged, or transferred as a capital asset in 2023 or digital assets that were given as a gift.
How do I record crypto on my tax return? ›
Add the value of these under the heading 'Other income' in your tax return. Make sure to do this in the financial year you received it. When you later sell the crypto you earned through staking or airdrops, the amount you reported as income will be your cost base for calculating CGT.
How to fill out form 8949 for cryptocurrency? ›
How to fill out Form 8949 for cryptocurrency
- Export all cryptocurrency transactions. ...
- Collect information and calculate gain/loss. ...
- Categorize transactions into short-term and long-term disposals. ...
- Select the correct checkbox. ...
- Report your disposals on Form 8949. ...
- Report your net gain or loss on Schedule D.
You'll pay a 0%, 15%, or 20% tax rate depending on your taxable income. If you earn less than $44,626 including your crypto (for the 2023 tax year) then you'll pay no long-term Capital Gains Tax at all. It's important to note that for NFTs deemed collectibles, you may pay a higher 28% tax on long-term gains.
What happens if I don't report crypto on taxes? ›
US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.
Disclaimer
- Sign up and connect to a crypto tax calculator.
- Download your crypto tax report.
- Log into the Income Tax Portal and start your ITR-2.
- Report your capital gains in Schedule VDA.
- Report other income from crypto.
- Complete your other required schedules.
- Proceed to verification.
- FAQs.
Under some circ*mstances, Coinbase does report to the IRS, but that doesn't imply the individual taxpayer is not responsible for reporting. Coinbase's reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.
How do I write off crypto taxes? ›
Yes, you can write off crypto losses on taxes even if you have no gains. If your total capital losses exceed your total capital gains, US taxpayers can deduct the difference as a loss on your tax return, up to $3,000 per year ($1,500 if married filing separately).
How much crypto do you have to make to report on taxes? ›
You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.
How to calculate crypto taxes? ›
Finding your cost basis
This refers to the original value of an asset for tax purposes. In order to calculate crypto capital gains and losses, we need a simple formula: proceeds - cost basis = capital gain or loss. Note that two additional variables may affect your cost basis: accounting method and transaction fees.
What are the IRS rules for crypto? ›
Income received from mining, staking or airdrops is taxable and must be reported as ordinary income using the fair market value of the cryptocurrency at the time it was received. Further, income from mining or staking may be reported on Form 1099-MISC (Miscellaneous Information) if it is conducted as a business.
What does the IRS consider a digital asset? ›
A digital asset is a digital representation of value that is recorded on a cryptographically secured, distributed ledger. Common digital assets include: Convertible virtual currency and cryptocurrency.
Why does TurboTax ask if I bought cryptocurrency? ›
The IRS treats cryptocurrency as property, meaning that when you buy, sell or exchange it, this counts as a taxable event and typically results in either a capital gain or loss. When you earn income from cryptocurrency activities, this is taxed as ordinary income.
What is crypto income tax? ›
Profits on the sale of assets held for less than one year are taxable at your usual tax rate. For the 2024 tax year, that's between 0% and 37%, depending on your income. If the same trade took place a year or more after the crypto purchase, you'd owe long-term capital gains taxes.
