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Cryptocurrency purchases made in fiat currencies are not subject to any type of IRS tax reporting according to the IRS FAQs on cryptocurrency (Q5) updated as of March 2, 2021. 

Updated Q5 on IRS FAQs on virtual currency

Updated Q5 on IRS FAQs on virtual currency

IRS FAQs on virtual currency

For example, say Sam purchased 1 bitcoin (BTC) in 2020 for $1,000 and held it throughout the year. According to the updated FAQ-Q5, Sam is not required to check “yes” on the infamous virtual currency question appearing on the front of Form 1040 - “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. Sam can safely answer “No” on the question.

Prior to this updated guidance from the IRS, taxpayers were confused whether purchasing cryptocurrency in USD would require them to check “yes” on the virtual currency question. Given the limited IRS instructions on how to answer this question, some taxpayers checked “yes” even when they purchased cryptocurrency using USD, assuming they acquired a “financial interest” in virtual currency. 

This added guidance from the IRS provides more clarity to taxpayers when answering this question going forward. Further, privacy-focused crypto users would appreciate that they don’t have to disclose their involvement with cryptocurrency to the IRS needlessly. 

It should be highlighted that FAQ-Q5 only applies to cryptocurrency purchased in fiat. If you purchase a cryptocurrency using another cryptocurrency, you would have to check “yes” on the Form 1040 question. This could also trigger a taxable event for you.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.