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In 2021, I transferred funds from an existing Roth IRA into a new Roth SDIRA to purchase crypto. I also traded one cryptocurrency for another during 2021. How do I answer the question at the top of form 1040?
It isn’t clear what long-term plans the IRS has for the data gathered by this question or what the consequences for answering it incorrectly might be. However, we do know the IRS uses questions like this on Form 1040 to gather data for return processing and audit planning. There have also been instances where a taxpayer was sanctioned for willful non-compliance based on an inaccurate answer to similar demographic questions (e.g., with respect to foreign financial accounts). Checking either “yes” or “no” does not affect any other part of the return.
You may have noticed the wording of the virtual currency question changed slightly for the tax year 2021 to omit the word “acquire.” Instead, the IRS used words that have tax implications- “receive, sell, exchange, or otherwise dispose.” This is likely because the IRS is attempting to zero in on reportable income or loss-generating activity, as opposed to just surveying who might own virtual currency. In that context, a trade of one coin for another would likely fall into the kinds of activity the IRS is asking about (as “exchange”). On the other hand, an IRA not only is a separate entity from its beneficiary, but it also isn’t even a taxpayer under most conditions. Activity in an IRA should not be reported on Form 1040, and the IRA should not be taken into consideration when answering this question on a taxpayer’s personal income tax return.