7724 / How does a taxpayer report a transaction in which bitcoin or other virtual currency is involved?
The IRS now asks about cryptocurrency transactions on taxpayers’ Form 1040 federal income tax returns. The IRS’s question asks the taxpayer if they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during the tax year. Every taxpayer must answer either “yes” or “no.” Taxpayers must check "yes" if they (1) received digital assets as payment for property or services provided, (2) received digital assets resulting from a reward or an award, (3) received new digital assets resulting from mining, staking and similar activities, (4) received digital assets resulting from a hard fork (which is defined as a branching of a cryptocurrency's blockchain to split a single cryptocurrency asset into two), (5) disposed of digital assets in exchange for property or services, (6) disposed of a digital asset in exchange for another digital asset, (7) sold a digital asset, or (8) otherwise disposed of any financial interest in a digital asset.1
However, the IRS also released guidance clarifying that taxpayers who purchased cryptocurrency with “real” currency are not required to answer the question with a “yes” if they had no other cryptocurrency transactions during the tax year because a taxpayer who merely owns cryptocurrency is not taxed on any gains or losses until they sell or otherwise exchange the cryptocurrency. In other words, there has been no realization event that would trigger tax liability.
Dispositions of bitcoin as property must be reported to the IRS in the same manner as any other intangible property transactions, meaning that the taxpayer will be required to complete and file Schedule D and Form 8949, or Form 4797, to report the transaction in accordance with the instructions to those forms. The reporting requirements do not vary because the property transferred is bitcoin.2 Each bitcoin trade should be reported separately.