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In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938, explaining that virtual currency is treated as property for Federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency. Since the IRS classifies cryptocurrencies like stocks and other investments, not cash or currency. Therefore, a taxpayer is required to report gains and losses on sales, exchanges, and purchases of goods and services. In addition, if you receive any virtual currency as compensation for services or disposed of any virtual currency that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type.
Form 1040 for tax year 2020 required taxpayers on page one to specifically check the box “yes” or “no” to the following question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The IRS began including the cryptocurrency question in its tax form a couple of years ago. However, the question was previously on Schedule 1, the form used for declaring “Additional Income and Adjustments to Income.” If you check “no” to this question when you did, in fact, engage in cryptocurrency transactions, the IRS can consider that a willful attempt to avoid taxes, and you could face harsher penalties if the IRS uncovers your omission.