Non-Taxable Transactions: Introduction

Accounting For Crypto Assets

Many actions you’ll take with crypto are not taxable. Here’s a non-exhaustive list, and we’ll cover each in more detail in this course:
– Buying crypto or NFTs with fiat currency
– Transfers
– Borrowing crypto
– Gifting and donating crypto assets
– Receiving crypto as a gift
– Inheriting crypto
– Soft forks

It is not always apparent whether a transaction involving crypto assets causes a taxable event or not. The IRS has shed some light on what does not facilitate a taxable transaction with respect to virtual currency. We can take this a step further and generally apply the same tax treatment to transactions involving other forms of crypto assets, including NFTs (although there may be exceptions).

About three inches down from the top of the first page of your individual income tax return (Form 1040 pictured above), beginning in 2020, you will find a variation of the question: “At any time during (insert tax year), did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

2022’s proposed Form 1040 language is more concise:
“At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or financial interest in a digital asset)? (See instructions.)”

This message is the IRS prompting you to include your taxable crypto transactions in your tax return because Uncle Sam wants his cut. You must check either the “Yes” or “No” box as leaving it blank is not an option. This question on your 1040 also provides the breadcrumbs leading us to which crypto transactions are not taxable; deep in the form’s instructions, you find the following:

“A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control. If your only transactions involving virtual currency during 2021 were purchases of virtual currency for real currency, including the use of real currency electronic platforms such as PayPal and Venmo, you are not required to check the “Yes” box next to the virtual currency question.”

The sole act of purchasing crypto assets at fair market value (FMV) would not require you to check “Yes” and would not cause a taxable event. Per the IRS, fair market value (FMV) is “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” We emphasize FMV because if you purchase crypto assets for less than FMV, you are likely receiving a discount in exchange for property, goods or services. To “receive” crypto is a condition to check “Yes” on the 1040 and is a taxable event (more on this later).