When Must You Check “Yes” to the IRS Crypto Question on Form 1040?

Millions of bitcoin owners getting it wrong - likely including you

Ric Edelman: It's Tuesday, March 12th. On today's show, Crypto Taxation. 52 million US adults own Bitcoin these days and you need to make sure you understand crypto taxation. This podcast is not going to be a master class on it. That would take me two hours.  What I want is to simply give you what you need to know about crypto taxation, and I want you to know here that your crypto activities are taxable. You've got to report the results on your tax return, along with all the other aspects of your income and gains and losses. The problem is that right now, nobody issues 1099’s involving crypto. If you are earning interest in a bank account, the bank sends you and the IRS a 1099 reporting your interest income. If you own stocks and you get dividends, or if you sell stocks during the year, your brokerage firm sends you and the IRS a 1099 reporting all that activity. If you withdraw money from your retirement account, your plan custodian sends you and the IRS a 1099. If you get pension income, a 1099 gets generated. But if you buy Bitcoin from a crypto exchange, nope, they don't issue any 1099…not yet anyway. 

They'll have to start in 2026, but for 2023 tax prep no 1099 for crypto. Talk about a big opportunity for tax evasion. Whether you get a 1099 or not, though, you are responsible for reporting your income gains and losses to the IRS. Since there's no 1099, that means you've got to maintain your own records of all your transactions. There are some great crypto tax record-keeping systems that make this easy for you, and you ought to use them. The IRS, though, knows that you're probably not paying your taxes on your crypto. In one IRS study of 5 million people who own crypto, less than 1,000 of them reported any earnings on their tax returns. Give me a break. Coinbase alone has 100 million customers, 10% of them, 10 million people trade every month. The IRS says a whole lot of them are not reporting any of this on their tax returns. And the Congressional Budget Office says that the IRS is missing out on $28 billion in tax collection. Now, not everybody who owns crypto is a tax cheat. 

In one industry survey, 40% of the people who own Bitcoin said they simply didn't know how to report their crypto activities on their 1040. This is why the IRS has inserted a new question about crypto. It's right at the top of form1040. You've seen it and the IRS is not stopping there. They are now putting that question on form 1041 for taxes and estates, on form 1065 for partnership income, form 1120 for corporate income taxes, and form 1120 for S corporations. The IRS is serious about this. You're no longer going to be able to complain you didn't know. Here's the question the IRS asks right at the top of the 1040. I want you to pay attention to this because I'm going to give you a little quiz afterward. Here's the question. At any time during 2023, did you A…receive as a reward, award, or payment for property or services, or B…sell, exchange or otherwise dispose of a digital asset or a financial interest in a digital asset? That's the question. So, here's the quiz. Say that in 2023 you bought Bitcoin. Do you check yes or no on the 1040?  

The answer to my question is no. I asked if you bought Bitcoin in 2023. Do you check yes or no on the box on the 1040? The answer is no. You did not receive Bitcoin. You did not sell, exchange or otherwise dispose of it.  Buying Bitcoin is not the same as receiving bitcoin, but I don't think a lot of taxpayers understand the difference. And that difference is huge because it determines whether or not you’ve got to check yes or no on the box. And if you do have to check yes because you received Bitcoin as payment for property or services provided, or you receive digital assets as a reward, or you receive digital assets for mining or staking, or you receive digital assets as a result of a hard fork, or you exchanged your digital assets for property or services, or you traded your digital assets for another digital asset. Or if you sold your Bitcoin, then not only do you have to check the yes box, you've also got to report all the income you got from all of your digital asset transactions. It also means you’ve got to file form 8949 for sales and dispositions of capital assets. You've also got to compute capital gains and losses, which you then report on schedule D, or you've got to use some other different tax form for your receipt of the crypto that you earned as income. And if that all is not enough, you might also have to file form 709, the gift tax return, if you gave your Bitcoin away as a gift. 

You getting all this? Crypto taxation is a real thing as much as it is for stocks and bonds and real estate. And if you're a service provider who was paid in Bitcoin, you typically have to report that income on Schedule C, like I said, 52 million people in America own Bitcoin. Maybe you're one of them. If you're a financial advisor, you absolutely have clients who own Bitcoin. You think everybody knows all this stuff. You think your clients know all this stuff? You think their tax preparer knows all this stuff. Hang on. Just to be clear, if you owned digital assets in 2023 but you didn't sell or transfer them, you can check “no” to that crypto tax question on your 1040. But let's say, another quiz here. You own two digital wallets. You have one digital wallet at Coinbase. You've got another one, say at MetaMask you send some of your Bitcoin from one of those wallets to another. Do you check “yes” or “no” on the 1040? No. The transfer of crypto from yourself to yourself is not taxable. It's not even within the scope of the IRS question. And let's say you've got money in your bank, and you open a Coinbase account and you transfer money from your bank to Coinbase. And once the money is in Coinbase, you use it to buy Bitcoin. Do you check yes or no on the 1040? No, the IRS doesn't care if you buy bitcoin. 

They only want to know if you sell it or dispose of it. Same as with stocks. You can read all about this on the Digital Assets page at IRS.gov. Now you know one big reason why I'm a fan of the new spot Bitcoin ETFs. They are ETFs. They are taxed like ETFs. Simple. Clean easy. And you're very familiar with them. You get a 1099 from your brokerage account. You get to check the box “No” because you're not buying or selling Bitcoin. You're buying and selling shares of an ETF. Now you know why I was working so hard over the past ten years, along with a whole lot of other people in the crypto community, to get the SEC to approve these ETFs. They make life so much easier. If you want to buy bitcoin and you want to keep your taxes simple, buy the Bitcoin ETF. You don't have to worry about everything I just talked about for the past seven minutes. There's a lot more to all this crypto taxation, but like I said, that would take a full two-hour course. Bottom line is, if you own crypto, you're going to owe taxes. If not this year, then eventually. 

On tomorrow's show: Is AI going to make everyone a star or are Hollywood stars a thing of the past?

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