2020 Form 1040 Virtual Currency Question

Taxpayers who own virtual currency, also known as “cryptocurrency,” may be confused about how to respond to a question on the 2020 Form 1040, U.S. Individual Tax Return, now due May 17, 2021 (extended from April 15, 2021).  The IRS recently clarified part of the question, but did not answer all the questions taxpayers have about the inquiry, nor how the IRS will use taxpayer responses for enforcement purposes.

The 2019 Form 1040 was the first time any question was asked on a U.S. income tax return about virtual currency.  It was listed on Schedule 1 in 2019, but for 2020, it was moved to the first page of Form 1040, asking: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

The term “acquire” seemingly includes a situation where a taxpayer purchased virtual currency with money during 2020.  In fact, the 2020 Form 1040 instructions state that a taxpayer should answer “Yes,” if the taxpayer “engaged in any transaction involving virtual currency.”  That clearly includes the purchase of virtual currency with money.  But on March 3, 2021, the IRS updated the Frequently Asked Questions on Virtual Currency Transactions (“FAQs”) on its website, stating that if a taxpayer acquired virtual currency by purchasing it with real currency (the U.S. Dollar or other foreign currency), then the answer to the question is “No.”

This change in information came several weeks after the IRS began accepting 2020 Forms 1040 for filing, so there are presumably many taxpayers that answered “Yes” to this question on their already-filed return and should have instead answered “No.”  The IRS has not disclosed what it is doing with the answers to the questions and whether an answer will trigger future inquiry by the IRS. 

The IRS did not address whether a taxpayer needs to amend their 2020 Income Tax Return if he/she answered “Yes,” but should have instead marked “No,” based on this new information.  Many taxpayers will not know to check the FAQs before filing their tax return, but another problem is that these Virtual Currency FAQs are not law and may not be relied upon for positions on a tax return.  It’s unclear how this conflicting information between the Form 1040 instructions and the FAQs will impact taxpayers that incorrectly answered the question.

If you have questions, contact Anderson & Jahde for help.

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