Cryptocurrency Taxation Written By Donovan Thiessen, CPA
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t any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? Yes or No? You might have been asked this by your CPA while your prior year income tax return was being prepared. You might (you should) be asked this same question this year, because this is a question that you must answer on page 1 of your Form 1040 Federal income tax return. As you sign the income tax return, do not forget your attestation: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which the preparer has any knowledge.” The IRS uses the term “virtual currency” to define the various types of intangible, digital assets more commonly known as cryptocurrency. The most popular cryptocurrencies are bitcoin, ethereum, and dogecoin. I’ve seen a sharp increase in this
activity over the recent two years. Unfortunately, there appears to be a common lack of understanding on how these assets are treated for income tax purposes. Although the online exchanges are providing better reports to assist with income tax preparation, the average person is trading these in a way that creates unforeseen complexities for tax reporting. This can cause unexpected, additional, fees for accounting and income tax preparation. Worse, it can cause surprise tax liabilities and draw scrutiny from the IRS. This article will give you an insight into the accounting and taxation of trading cryptocurrencies and will improve your organization and record keeping for this activity. The IRS has increased its enforcement efforts for virtual currency transactions in recent years. On the current income tax return, they ask the first question in this article immediately after asking your name and address. In other words, it is a headline level question. Reading it closely, it does not ask if you merely purchased virtual currency. If that is all that you did during the calendar year in question, then you may answer “no.” Otherwise, if your answer is “yes,” you might be surprised as
