IRS Clarifies Who Needs To Answer “Yes” to 1040 Cryptocurrency Tax Question

At the end of 2019, the IRS introduced the infamous Virtual Currency Tax Question to U.S. tax forms—specifically to 1040 Schedule 1. This action made it clear that the agency was cracking down on crypto tax compliance.

Now in 2020, they have taken this enforcement a step further. 

Instead of being displayed on Schedule 1—which not all American taxpayers are required to complete—the agency moved the virtual currency tax question front and center to Form 1040, the main American income tax form that every individual taxpayer must complete.

The question reads:

“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

1040 Cryptocurrency Question

The Problem With This Question

The issue with the virtual currency tax question is that it is extremely vague, and it is not perfectly clear in what circumstances you would have to select “Yes” to this question.

For example, if you had purchased bitcoin in 2018 and held it in a cold wallet all throughout 2019, would you have to select yes? You didn’t actually partake in any of the listed actions within the question (i.e. receive, sell, send, exchange). You just held onto your bitcoin. During the 2019 tax years, arguments could have been made for both sides.

Gray areas like the above had many crypto investors and tax professionals frustrated with the 2019 version of this question.

Now, as of October 2020, the IRS has added instructions explaining in what circumstances crypto investors need to be selecting “Yes” to the virtual currency tax question. 

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Who Needs To Select “Yes”?

On October 23, 2020, the IRS published its draft of the official 2020 1040 Guidance. In this guidance, the agency explains which cryptocurrency transactions would require an answer of “Yes” to the virtual currency tax question.

The instructions clearly state: 

If, in 2020, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040. 

A transaction involving virtual currency includes:

  • The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
  • An exchange of virtual currency for goods or services;
  • A sale of virtual currency; and
  • An exchange of virtual currency for other property, including for another virtual currency

At the same time, a transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet you own or control to another that you own or control.

So put simply, you only have to select “Yes” to the cryptocurrency tax question if you have incurred a taxable event and realized some form of crypto-related income. 

For a complete overview of cryptocurrency taxable events and how to report crypto on your taxes, reference our blog post: The Complete Guide to Crypto Taxes.

CryptoTrader.Tax

Cryptocurrency Tax Software

If you are looking for an easy way to handle your cryptocurrency tax reporting it can be useful to look into specialized crypto tax software.

Cryptocurrency tax software like CryptoTrader.Tax is built to automate all of your crypto tax reporting. By integrating with all major exchanges and wallets, you can simply import your historical cryptocurrency transactions into your account with the click of a button.

Based on the historical data that you import, CryptoTrader.Tax will determine which transactions are taxable and which aren’t. It will then auto-generate all of your necessary crypto tax reports based this historical data.

CryptoTrader.Tax Integrations

You can get started by importing all of your historical data completely for free. You can also learn more about how it works and why tens of thousands of crypto investors all over the world use CryptoTrader.Tax right here.

Questions?

Do you have any other cryptocurrency tax questions? Our team would be happy to answer them. Simply chat in with us on the live chat widget on our homepage. Our live-chat support team will be happy to help!