Virtual Currency – New 1040 Disclosure

October 28, 2020

In 2019 the IRS introduced a new question on Schedule 1 of Form 1040 specifically asking if the taxpayer did any trades with virtual currency. This question was meant to assist in the determination of whether the taxpayer properly reported such trades, and to put others on notice that the IRS is taking virtual currency tax reporting seriously. However, only those taxpayers filing Schedule 1 because they had certain income and adjustments to disclose were required to answer that question.

New for 2020, this question appears on Form 1040 itself, just below the taxpayer’s name and address as the very first question the form asks – At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency?

Taxpayers who only held virtual currency during 2020, or who transferred currency from one wallet they own or control to another wallet they own or control can check “no” to this question. However, any other type of virtual currency transaction is subject to answering “yes” to this question.  Not all “yes” transactions are reportable. Below are common scenarios and whether the question is triggered as well as if there is a transaction reporting requirement.

Virtual Currency Activity Answer to Question Transaction Reporting
Holding No No
Transferring between your accounts of the same currency No No
Transferring between your accounts of different currency Yes Yes
Buying virtual currency (whether with traditional or virtual currency) Yes No
Selling virtual currency (whether for traditional or virtual currency) Yes Yes
Mining Yes Yes
Receiving as a gift or inheritance Yes No
Giving as a gift Yes Yes
Giving to charity Yes Yes
Paying for goods or services Yes Yes
Receiving in exchange for goods or services Yes Yes
Airdrop Yes Yes
Soft fork No No
Hard fork Yes Yes

The transaction reporting is dependent on the type of transaction involved. Each transaction needs to be evaluated to determine how and where on the tax return it is to be disclosed. With the IRS’ increasing focus on virtual currency transactions, it is best to discuss your situation with your tax advisor so that you are well prepared in ample time for tax return filing. For questions on virtual currency matters, please contact Larry Rubin, Aronson’s tax controversy practice lead partner, at 301.222.8212.