The 2021 1040 tax return includes a question regarding virtual currency transactions during the calendar year. This question must be answered either yes or no. If the return is filed leaving the box blank, the return will be rejected and a new one must be filed.
To determine how this question is answered, consider what type of virtual currency transactions you made during the year. Did you:
- Receive or exchange virtual currency for payment for goods or services?
- Sell virtual currency or trade/exchange it for other virtual currency?
- Receive new virtual currency from mining and staking activities?
These are examples of transactions that would require the question to be answered “Yes”.
Taxpayers who were compensated for services in virtual currency should treat it like income on a W-2. If disposed of by sale in a trade or business, report the income on a schedule C.
Examples of transactions where the question could be answered “No”:
- You only held the virtual currency in your own wallet or transferred between your own accounts or wallets.
- You purchased virtual currency with real currency, including through use of platforms such as PayPal, Venmo and other TPSOs.
- You engaged in transactions that are some combination of the above.
The tax implications for funds raised through crowdfunding campaign center around to two concepts:
- Whether or not the contributor received something of value in return for the donation. If so, then the monies received through the campaign are taxable to the organizer.
If all the money received is distributed to the campaign’s beneficiary/beneficiaries for whom the campaign was organized, the organizer may not need to include it in their gross income.
- The beneficiaries might be able to exclude the receipts from gross income as gifts If the contributions are donated with “detached and disinterested generosity”.
Either way, the crowdfunding website or payment processor may be required to report the money raised through the campaign on IRS Form 1099-K, Payment Card and Third-Party Network Transactions, if the amount raised exceeds the reporting thresholds as modified by the American Rescue Plan Act (ARPA) effective January 1, 2022.
These lists are not all inclusive of the possible transactions and situations involving the tax treatment of virtual-currency transactions or crowdfunding campaigns on your individual income tax return.
In a related article, IRS Focuses on Internet Small Business And Side Hustle Income, we discuss more about 1099-K reporting.
To learn how your tax situation might be affected by these issues, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.
By: Joe Turnes
Photo by: kipcurry from Freeimages