crypto question etf tax question 1040

[sandrawa]

At any time during 2023, 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)? 

If I buy and sell BITW or any of the new bitcoin ETF would that question be yes? OR are they referring to if you buy crypto currency directly on exchanges where 1099 is not issued?

[JamesG1]

The IRS defines digital assets in this document.  The IRS further explains the digital asset statement on the 2023 Federal tax return here.

Definition of Digital Assets

Digital assets are broadly defined as any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.

Digital assets include (but are not limited to):

• Convertible virtual currency and cryptocurrency
• Stablecoins
• Non-fungible tokens (NFTs)

Digital assets are not real currency (also known as “fiat”) because they are not the coin and paper money of the United States or a foreign country and are not digitally issued by a government’s central bank.  

A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, has been referred to as convertible virtual currency.

A cryptocurrency is an example of a convertible virtual currency that can be used as payment for goods and services, digitally traded between users, and exchanged for or into real currencies or digital assets.

When to check "Yes"

Normally, a taxpayer must check the "Yes" box if they:

• Received digital assets as payment for property or services provided;
• Received digital assets resulting from a reward or award;
• Received new digital assets resulting from mining, staking and similar activities;
• Received digital assets resulting from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
• Disposed of digital assets in exchange for property or services;
• Disposed of a digital asset in exchange or trade for another digital asset;
• Sold a digital asset; or
• Otherwise disposed of any other financial interest in a digital asset.

 

[sandrawa]

Hi,

I know that is what it says but at end it mentions

"

• Otherwise disposed of any other financial interest in a digital asset."

So does owning an etf mean financial interest or do they mean direct ownership

[PatriciaV]

No, when you buy an ETF, you aren't buying the underlying investment directly. Bitcoin ETF is a fund traded on the stock exchange that tracks the performance of Bitcoin itself. At this time, there are no ETFs that actually own digital assets. This is because crypto in general isn't regulated by the SEC. For this reason, BItcoin ETF is not considered to be cryptocurrency.

[FC86]

I'm still confused about this issue. The prospectuses of the new spot bitcoin etfs all
say that you own a pro-rata share of the bitcoins in the fund. Also, all expenses are paid
through the sale of bitcoins (the funds are 100% bitcoin). Doesn't that mean that you have a financial
interest in a digital asset and you have to answer the 1040 question "yes" (I'm thinking
about the 2024 return if I buy the etfs this year and have to report my share of gains/loss on
a pro rata share of the sale of the bitcoins to cover fund expenses). How about the funds that use bitcoin futures?

[JamesG1]

You have a financial interest but the question refers to receiving, selling and disposing of the digital asset.

The digital asset question on the 2023 Federal 1040 tax return is:

At any time during 2023, 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)?

This IRS document outlines these circumstances when you should select "Yes" to the 2023 Federal 1040 tax return digital asset question.

Normally, a taxpayer must check the "Yes" box if they:

• Received digital assets as payment for property or services provided;
• Received digital assets resulting from a reward or award;
• Received new digital assets resulting from mining, staking and similar activities;
• Received digital assets resulting from a hard fork (a branching of a cryptocurrency's blockchain that splits a single cryptocurrency into two);
• Disposed of digital assets in exchange for property or services;
• Disposed of a digital asset in exchange or trade for another digital asset;
• Sold a digital asset; or
• Otherwise disposed of any other financial interest in a digital asset.

@FC86 

[FC86]

JamesG1, thanks for responding to my question. You seem to be saying that an investor in
one of the new bitcoin etfs would answer "No" to the 1040 digital asset question.

I have read the IRS explanation of the digital asset question many times but I keep
getting hung up on the last bullet point:

"Otherwise disposed of any other financial interest in a digital asset."

The prospectus for the Fidelity Wise Origin Bitcoin (FBTC) has the following on page 96.

"Individual U.S. Shareholders will be required to report on their federal income tax return the receipt, acquisition, sale, or exchange of any financial interest in virtual currency, which includes a Shareholder’s interest in bitcoin held by the Trust."

Doesn't this imply that an investor would need to answer "Yes"?

[sandrawa]

hard to say but i doubt it the reason is because theyh already report this on 1099-b, that question basically refers when you buy the coin directly from coinbase since coinbase does not issue 1099. they want to know about transactions that are not reportable but laws can change from time to time 

[Theausted]

Yes, if you buy and sell BITW or any other Bitcoin ETF, this question will apply because in this case you are dealing with digital assets and transactions with them may be subject to reporting requirements. However, it is important to note that if you buy cryptocurrency directly through exchanges, you may also be issued 1099 forms if you receive income from such transactions. Therefore, it is always a good idea to consult with a tax professional to properly report transactions with digital assets.

Personally, I am involved in cryptocurrency trading, and in order to take my first steps in this area, I used resources from the learn.binany.com platform. This is a great way for beginners to understand the nuances of cryptocurrency trading and to safely manage their assets.