The Cryptic Crypto Question On Your Tax Return

On the 2020 Form 1040 the IRS inserted a question just below your name and other contact information. The question read:

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

The recently released draft of the 2022 form 1040 features an update to this cryptocurrency question. It now reads:

At any time during 2022, did you: (a) receive crypto as a reward, award, or compensation; or (b) sell, exchange, gift, 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 are receiving it or you are selling, gifting or otherwise disposing if cryptocurrency. Receipts such as awards and compensation, are taxable, and so should be reported, but a gift is only reportable if it exceeds $16,000 as of 2022, yet a gift in any amount will require your checking the box ‘yes’. So the question is whether you must report any gift no matter how small.

Some think it likely that the IRS will refine the question, but not expand it, so that taxpayers of the reporting requirements are limited to reporting gifts over the annual exclusion. This is in line with the history of how the IRS has handled this question. When it was 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” it potentially non-taxable actions, such as purchases.

For 2020, the IRS used the same question but moved it to the first page of Form 1040, which is required to be prepared by all taxpayers. In 2021, the IRS changed the crypto question to ask if you received, sold, exchanged, or disposed of virtual currency and that . if you only bought crypto with US dollars and held it, you did not have to check “yes.”

Now tax preparers will have to decide, do they advise their clients to report any gifts of cryptocurrency, no matter how small, or should they only report gifts that exceed the $16,000 annual exclusion for 2022? Get out your Magic 8 Ball and hope that the answer is not “reply hazy, ask again”

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