15479: 1040 - Virtual Currencies and Digital Assets - EF Message 2260

This article discusses digital assets* such as: 

• Virtual Currencies (Bitcoin, Ether, Litecoin, Ethereum, Dogecoin, etc.),
• Stablecoins (Tether, USD Coin (USDC), etc.), and 
• Non-fungible tokens (NFTs).

Data entry points vary depending on how the currency or asset was received, sold, purchased, etc. and what year of Drake is being used (see below for year-specific info). Also see the following IRS resources for details, or contact the IRS directly for more guidance. 

• Virtual Currencies Page
• FAQ on Virtual Currency Transactions
• Form 8949, Sales and Other Dispositions of Capital Assets
• Form 1040, Schedule D, Capital Gains and Losses
• IRS Virtual Currency Guidance News Release
• Notice 2014-21
• Publication 525
• Publication 544

Drake22

In Drake22, virtual currencies are now included in what the IRS is generally calling Digital Assets. *The IRS defines digital assets as follows: 

"Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes."

Data entry points remain the same as in prior years: 

• Screen 1 checkbox to indicate whether or not the taxpayer received (as a reward, award or payment for property or services) or sold, exchanged, gifted or otherwise disposed of a digital asset (or a financial interest in a digital asset). 
  • This is required to be answered on all 1040 returns and the answer appears below the address section on Form 1040. EF message 2260 generates preventing e-file until a selection is made.
• Screens 8949 and/or D2 for sales of digital assets. 
• Screen 3, line 1 to report digital assets received as wages.
• Screen C to report digital assets received as compensation related to your business. 

Drake21 

Data entry points: 

• Screen 1 checkbox to indicate whether or not the taxpayer received, sent, exchanged, or otherwise acquired any financial interest in any virtual currency.
  
  • This is required to be answered on all 1040 returns and the answer appears below the address section on Form 1040. EF message 2260 generates preventing e-file until a selection is made.
• Screens 8949 and/or D2 for sales of virtual currency. 
• Screen 3, line 1 to report virtual currency received as wages.
• Screen C to report virtual currency received as compensation related to your business. 

The 2021 Instructions provide more detail on reporting:

"Virtual Currency Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. The IRS uses the term “virtual currency” to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.

If, in 2021, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR. A transaction involving virtual currency includes, but is not limited to:

• The receipt of virtual currency as payment for goods or services provided;
• The receipt or transfer of virtual currency for free (without providing any consideration) that does not qualify as a bona fide gift; 
• The receipt of new virtual currency as a result of mining and staking activities;
• The receipt of virtual currency as a result of a hard fork;
• An exchange of virtual currency for property, goods, or services;
• An exchange/trade of virtual currency for another virtual currency;
• A sale of virtual currency; and
• Any other disposition of a financial interest in virtual currency.

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. You must not leave the field blank even if you are not required to answer “Yes”. If you disposed of any virtual currency that was held as a capital asset through a sale, exchange, or transfer, check “Yes” and use Form 8949 to figure your capital gain or loss and report it on Schedule D (Form 1040).

If you received any virtual currency as compensation for services or disposed of any virtual currency that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1). For more information, go to IRS.gov/virtualcurrencyfaqs."

Drake20

In Drake20, the Virtual Currency question has been moved to page 1 of Form 1040.

You can answer either Yes or No by checking the appropriate box near the bottom of federal screen 1: 

EF message 2260 generates preventing e-file until a selection is made.

Drake19 

In 2019, the IRS added a question to Form 1040, Schedule 1 regarding virtual currencies. Per the 1040 Instructions, "If, in 2019, you engaged in any transaction involving virtual currency, check the 'Yes' box next to the question on virtual currency at the top of Schedule 1." In Drake19, this question can be answered on screens 1 or B3. Note that you can only answer the question on screen 1 if both the foreign accounts and virtual currency questions should be "no." Otherwise, you must make the necessary entries on the B3 screen instead. 

Screen 1 checkbox if the answer to both questions is NO:  

Screen B3 must be used if the answer to either or both questions is YES. Note the three required entries, highlighted in blue: 

If Schedule 1 is produced on the return and no answer is given, EF Message 2260 is produced.  If Schedule 1 is not produced, Note 243 is generated in view mode if there is no answer given, however, this will not prevent e-file.