What You Need To Know Before Filing

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Since 2020, federal tax forms have asked about Bitcoin and other cryptocurrency activities. The question that appears at the top of Form 1040 currently reads, ⁘At any time during 2024, 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)?⁘

What do you do if you check the Yes box? How do you enter these transactions as you prepare your income tax return ? Below, we answer those questions and explain all that's relevant to taxes and cryptocurrency.

Let's first make sure we're on the same page when it comes to crypto tax prep. The IRS defines cryptocurrency as a ⁘digital representation of value recorded on a cryptographically secured, distributed ledger (blockchain) or similar technology.⁘ You can't see it, hold it in your hand, or put it in your (physical) wallet.

Cryptocurrency has been in use for over a decade. It has grown in popularity over the last few years ( based on research from Security.org , 28% of American adults own cryptocurrency in the US today, rising from just 15% in 2021). Instead of using a bank to create, transfer, and exchange funds, cryptocurrency employs a distributed and encrypted blockchain network to process transactions. No bank or government authority controls cryptocurrency, but they certainly regulate it (or try to), including by imposing taxes on the profits you gain from it.

Cryptocurrency units are called coins, even though there aren't any physical coins. You store coins and fractions of coins in a digital wallet under your control or use a custodial service similar to a financial brokerage. A few of the major exchange and wallet providers are Binance, Coinbase, Kraken, and eToro.

You can use cryptocurrency to pay for goods or services, invest, or simply exchange funds with someone else, whether for other cryptocurrencies or traditional currency. (The latter are also known as fiat currencies because they exist by fiat, or decree, of government authorities, and their supply has no hard limit, unlike Bitcoin and other cryptocurrencies.) Cryptocurrency transactions appear on an anonymized, encrypted blockchain, which you can think of as a digital public ledger.