Cryptocurrency purchases made in fiat currencies are not subject to any type of IRS tax reporting according to the IRS FAQs on cryptocurrency (Q5) updated as of March 2, 2021.
For example, say Sam purchased 1 bitcoin (BTC) in 2020 for $1,000 and held it throughout the year. According to the updated FAQ-Q5, Sam is not required to check “yes” on the infamous virtual currency question appearing on the front of Form 1040 – “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. Sam can safely answer “No” on the question.
Prior to this updated guidance from the IRS, taxpayers were confused whether purchasing cryptocurrency in USD would require them to check “yes” on the virtual currency question. Given the limited IRS instructions on how to answer this question, some taxpayers checked “yes” even when they purchased cryptocurrency using USD, assuming they acquired a “financial interest” in virtual currency.
This added guidance from the IRS