IRS posts finalized 1040 form with revised crypto question

The Internal Revenue Service (IRS) posted its finalized Form 1040, featuring some minor revisions to its crypto question.

The IRS included a question on cryptocurrency at the top of the 1040 form last year: "At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?" The IRS made the move in the hopes of curbing any confusion on reporting cryptocurrency. 

The 2020 wording left taxpayers with some questions, according to tax professionals. The previous iteration was unclear as to whether buying or holding qualified as transacting in crypto.

In March of this year, the IRS updated its frequently asked questions to clarify that "if your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question." This indicated the IRS was placing greater focus on crypto activity that constituted taxable events. 

The question still sits in its top slot, right below the identification information, but in this year's form, the tax watchdog slightly reworded the question.

"At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency," reads the form.

The previous version contained a catch-all asking if taxpayers had "otherwise acquire[d] any financial interest." That is not the case for 2021. The new language solidifies the clarification, since the phrasing only covers transactions that would constitute taxable events. 

With the finalized form will come a set of instructions on how to answer the question. Those instructions are still in draft form as of Dec. 3, 2021, but they direct taxpayers to answer "no" to the question if the only activity they've engaged in is holding, transferring coins between their own wallets or purchased crypto using fiat.

Activities like receiving crypto as payment; airdrops; exchanging crypto for crypto; selling; and receipt from mining, staking or hard forks would require the taxpayer to answer "yes" to the crypto question.