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- The Internal Revenue Service (IRS) of the United States has changed the crypto question on the primary tax form
- The IRS has narrowed the scope of the question by focusing on taxable bitcoin transactions
- The IRS has replaced the word sent with the word disposed of for the year 2021
The Internal Revenue Service (IRS) of the United States has changed the crypto question on the primary tax form. The IRS has narrowed the scope of the question by focusing on taxable bitcoin transactions.
On Form 1040, there’s a new crypto question
The Internal Revenue Service (IRS) released a draught Form 1040 for the tax year 2021 on Thursday. The most common tax form for filing individual income tax returns in the United States is Form 1040. The Internal Revenue Service (IRS) is quite interested in learning more about your cryptocurrencies. The IRS has relocated the cryptocurrency question from Schedule 1 of Form 1040, where it was in 2019, to page 1 of Form 1040 itself for the tax year 2020.
After the taxpayer’s name and address, the question is the second piece of information required. The following is the question: Did you ever receive, sell, send, swap, or otherwise acquire any financial stake in any virtual currency during the year 2020? If you bought cryptocurrencies, you should answer yes to the question, according to the draught guidelines for Form 1040. The examples indicating that taxpayers who purchased bitcoin should answer yes to the question were removed from the final Form 1040 guidelines. The question itself was unaffected.
New IRS guidelines
If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question, according to new IRS guidance released on March 2, 2021 (by updating Question 5 of its Frequently Asked Questions or FAQ). When it comes to adopting a position on a tax return, FAQs are not considered authoritative, and they change regularly. It’s dangerous to rely on FAQs for solid advice. At the very least, tax specialists advise printing a dated copy of the relevant FAQ into the client’s tax file. Keep a physical or electronic copy with your other tax paperwork if you do your own taxes.
Because it differs from the previous guidance and is ambiguous, the new guidance is causing confusion among taxpayers and tax experts. Many people (including many tax professionals) are perplexed as to why taxpayers are able to say no to the question when they plainly got or acquired a financial interest in cryptocurrencies during the year if they purchased bitcoin with real currency.
The tax office has slightly changed the crypto question in the draught form. The new crypto question is: Did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency during the year 2021?
Previously, the question was: Did you receive, sell, send, swap, or otherwise acquire any financial stake in any virtual currency during the year 2020? The IRS has substituted the word transmit with the word disposed of for the year 2021.
The amended inquiry merely inquires about your taxable transactions compared to the far greater reach of the 2020 version, Shehan Chandrasekera, Head of Tax Strategy at tax software startup Cointracker, explained. Although these adjustments have no significant impact on your taxes, he believes they reveal what the IRS has learned from the 2020 version and the way it is heading. If you transmit bitcoin between wallets/exchanges or buy it, both of which are non-taxable transactions, you don’t have to mark Yes’ under the amended question
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
