With the stricter regulations in federal income tax reporting that now include digital assets, there’s a need for cryptocurrency owners to be aware of how they should fill up their forms correctly to avoid potential sanctions from the Internal Revenue Service (IRS). This article explains what your answer should be to the particular question in the filing concerning “Digital Assets”.
The Underlying Question
According to the US Internal Revenue Service (IRS), crypto investors and/or traders are covered under the “Digital Assets” section of the updated 1040-SR form. As such they must be able to answer correctly the underlying question:
As shown in the encircled portion of the image above, there are only two ways to answer the question. Based on the corresponding checkboxes, you can only respond with either “Yes” or “No”.
When to Check “Yes”
Based on the guidelines provided by the agency, you should tick the checkbox that says “Yes” if you have used crypto or other digital assets under the following conditions:
- You took it as a form of payment for products and services provided. Likewise, this applies f you used your crypto to avail of products and services.
- You traded or converted your crypto with another kind of digital asset.
- Sold your crypto in exchange for cash.
- You have transferred it to another person for free or as a type of gift.
- You earned crypto as an award or reward for something that you did.
- You have earned new or additional assets via the process of mining, staking, and/or other related activities
- Gains new digital assets resulting from a hard fork. For the uninitiated, this can be defined as an irreparable split that divides one cryptocurrency into two. This comes as a result of blockchain users failing to arrive at a consensus on rule alterations or upgrades. Through this network bifurcation process, the original chain remains valid while those who disagree with the updates are given access to their own version of the same currency.
- Dumping of financial interest in a digital asset.
When to Check “No”
If the way you used or held your crypto does not fall into any of the categories mentioned earlier, you may tick the checkbox corresponding to “No”. Specifically, you can apply the same answer if you fulfill the following conditions:
- You merely held your crypto in your digital wallet or account.
- You just moved your crypto from another virtual wallet that you own.
- You purchased crypto using any currency and via electronic payment platforms. Here, the specifically mentioned platforms were PayPal and Venmo.
Final Thoughts
Should you have more questions about this subject that have not been covered by this discussion, it’s best to consult an authorized representative of the IRS about it or a lawyer specializing in US Taxation Law.