The Cryptic Crypto Question on Your Tax Return

On the 2020 Form 1040, the IRS inserted a question right below your name and other contact information. The question said:

“At any time in 2020, did you receive, sell, send, trade, or otherwise acquire a financial interest in any virtual currency?”

The recently published draft of the 2022 Form 1040 has an update to this cryptocurrency question. It now reads:

”At any time in 2022, have you: (a) received crypto as a reward, reward, or compensation; or (b) sell, trade, present, or otherwise dispose of a digital asset? »

The question that is on everyone’s mind is what does this mean?

Reading between the lines, this means that the IRS wants to know about any transaction involving cryptocurrency, whether you receive it or sell, give, or otherwise dispose of the cryptocurrency. Receipts such as awards and compensation are taxable and therefore must be reported, but a gift is only reportable if it exceeds $16,000 as of 2022, but a gift of any amount will require you tick the “yes” box. So the question is whether you have to declare any donation, no matter how small.

Some think it’s likely the IRS will refine the issue, but not expand it, so that taxpayers subject to reporting requirements will be limited to reporting gifts beyond the annual exclusion. This is consistent with the history of how the IRS has handled this issue. When introduced in 2019, the question was on Schedule 1 of Form 1040, but since many taxpayers do not complete Schedule 1 “Additional Income and Adjustments” and the language was so broad “receive, sell, send , exchange or otherwise acquire” these are potentially non-taxable actions, such as purchases.

For 2020, the IRS used the same question but moved it to the front page of Form 1040, which must be prepared by all taxpayers. In 2021, the IRS changed the crypto question to ask if you received, sold, traded, or transferred virtual currency and that. if you only bought crypto with US dollars and held it, you didn’t have to check “yes”.

Now tax preparers will have to decide, do they advise their clients to report any cryptocurrency donation, no matter how small, or should they only report gifts that exceed the $16,000 annual exclusion for 2022 ? Pull out your Magic 8 Ball and hope the answer isn’t “vaguely answer, ask again”