You'll need to answer this crypto question on your 2022 tax return

Cryptocurrency has exploded in popularity in recent years, and has all sectors of government on notice. President Biden recently signed an executive order asking the federal government to more closely examine the "risks and benefits of cryptocurrency".

Now that cryptocurrency is considered an asset, Uncle Sam is making taxpayers address it on this year's tax return.

Select details what you need to know about this question on your tax return, and how taxes work with cryptocurrency.

On this year's 1040 tax return form from the IRS, you'll see this question on the first page: "At any time during 2021, did you sell, receive, exchange or otherwise dispose of any financial interest in any virtual currency?"

While you can only answer with a simple yes or no, it's considered a "gotcha question," according to Eric Bronnenkant CFP, CPA and head of tax at Betterment. This is because so many people have entered the world of crypto without realizing the tax implications. And if you answer 'no' and the IRS finds that you had monetary gains or losses with cryptocurrency, it can qualify as lying on a government document under penalties of perjury, which is a serious offense.

To avoid any headaches with the federal government, there are a few details you need to know if you should answer yes or no to this question, directly from the IRS website.

• If you only bought crypto with U.S. dollars or another physical currency and didn't sell or exchange it, you are not required to answer yes to the question.
• If you received crypto in exchange for services or goods, this is considered ordinary income and should be claimed on your tax return.

And Mamie Wheaton, a financial planner with LearnLux, expanded on those circumstances to say "if you sold, exchanged or used digital assets for purchases you need to check yes."

If you aren't sure if your crypto positions need to be reported, Wheaton suggests to "reach out to the institution holding your crypto assets and request a statement or have an associate walk you through your transaction history." And she also suggests going forward to keep a concise record of your crypto assets and transactions for future tax years.

It can also be worth consulting your tax accountant to see what you should answer.

Because the crypto world is extremely dynamic and the federal government is still grappling with the emerging technology, the rules and regulations around the technology change frequently. But if you plan on investing in cryptocurrency, here's what to keep in mind for future tax returns:

• Document when you either bought or mined a specific coin, and what the fair market value is. While some of this info may be hard to obtain, the IRS still expects you to keep records of this. However, starting in 2023, the IRS will require crypto brokers to send out tax forms to investors.
• If you've realized losses trading crypto, you can write these off on your taxes just like you can with individual stocks.
• If you're actively purchasing, trading or collecting cryptocurrency, you'll likely need to fill out one or more of these forms: Form 8949 (logs every purchase or sale as an investment), Schedule D (a summary form of all capital gains or losses from all investments), Schedule C (if you've received coins from directly mining them yourself), or a Schedule 1 (if your crypto mining is a hobby and not a business).

This can prove to be a complicated process, so if you're bullish on cryptocurrency, you may consider using an online tax service like H&R Block or TurboTax, or a certified tax professional that is knowledgeable about cryptocurrency taxes to process your next tax return. And if you want to receive your tax refund in crypto, that's now possible with a new partnership between TurboTax and Coinbase.

Cryptocurrency is being treated as an asset, just like a home or stock portfolio. And because it's an asset with tangible value, the IRS wants to know if you're buying, selling or exchanging crypto.

It can seem easy to simply say 'no' on your tax return if you have a nominal amount of crypto to make your tax return simpler, but it's never a good idea to be dishonest on a tax document. The fines and fees could be steep, and worst case scenario, result in criminal charges.

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