Every US taxpayer filing a Form 1040 has to answer the digital asset question; it sits near the top of the form, just after your name and filing status, and you must check Yes or No. The question first appeared on Schedule 1 in 2019, moved onto Form 1040 itself in 2020, and now covers all "digital assets" rather than just "virtual currency".
The current wording is:
"At any time during the tax year, 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)?"
When to answer Yes
Check Yes if, at any time during the year, you:
received digital assets as payment for property or services
received digital assets as a reward or award, including from mining, staking, or similar activities
received new digital assets from a hard fork or an airdrop
sold digital assets for US dollars or any other currency
swapped one digital asset for another (including trades involving stablecoins)
spent digital assets on goods or services, whatever the amount
gave digital assets away as a genuine gift, or donated them
sold or otherwise disposed of any other financial interest in a digital asset
When you can answer No
You can check No if your only activity during the year was:
holding digital assets you already owned
moving digital assets between wallets or accounts that you own or control
buying digital assets with US dollars or another real currency, including through services like PayPal
This is the part that catches people out: simply buying and holding crypto does not require a Yes on its own. It is the receiving (as payment, reward, or award) and the disposing (selling, swapping, spending, gifting) that do.
Answer it truthfully
You sign your tax return under penalties of perjury, and the question must be answered by everyone filing, even people with no crypto at all. If you are unsure, the IRS has a short questionnaire to help: Determine how to answer the digital asset question.
Answering Yes does not automatically mean you owe tax; it simply flags that you had digital asset activity. Any income and capital gains from that activity should be reported in the normal way, and being consistent between the checkbox and the rest of your return helps you avoid follow-up questions from the IRS.
Recap calculates your crypto income and capital gains for you, so the rest of your return matches the box you tick.
Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.