New Draft form 1040 Released by the IRS…
When filing your 2020 1040 Individual Income Tax Return a “new” question will likely be on page one of this form. The Internal Revenue Service (IRS) has released a new draft of Form 1040, U.S. Individual Income Tax Return.
The question is “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. This question previously figured on Schedule 1 of the 1040. This meant that if a taxpayer did not otherwise need to complete Schedule 1, they were not required to answer the question. With this new draft form 1040 there will be no way to avoid this question for all U.S. 1040 filers.
As Chandan Lodha, co-founder of crypto tax software company CoinTracker, stated: “The implication for users is pretty clear—if you want to stay out of the IRS’ crosshairs, make sure you are staying compliant with the cryptocurrency tax rules.”
Virtual Currency, Cryptocurrency, What?!?
To be clear virtual currencies is used interchangeably with cryptocurrencies by the Internal Revenue Service. These include currencies such as Bitcoin, Litecoin, and Ethereum to name a few.
Bitcoin (BTC) was created by Satoshi Nakamoto. Bitcoin is botht he cryptocurrency AND the technology behind it. Since the inception of this technology in 2008 the number of available cryptocurrencies has ballooned. Today there are roughly 5,000 different cryptocurrency options. Bitcoin continues to dominate the crypto space. BTC is now being referred to as “better” than digital gold; many people and publicly traded companies now using Bitcoin as a store of value.
Back to the US tax return…
Code section 61 of the Internal Revenue Code states that “gross income means all income from whatever source derived”. This of course, unless there is a specific exclusion or exemption provided under the law. Virtual currencies do not benefit from an exclusion or exemption. As such ALL transactions that create a taxable event must individually be reported on your 1040. The new front page of the draft from 1040 should serve as a good reminder.
What are “taxable events” when it comes to cryptocurrencies?
A taxable or reportable event occurs when (this is an abbreviated list):
- you sell your cryptocurrency for FIAT (or exchange it for a service or physical product)
- you exchange one virtual currency for another; for example trading Bitcoin for Litecoin
- in this scenario BTC is in essence sold to acquire Litecoin
- Airdrops are taxable events. This occurs when a crypto-project distributes tokens/coins to wallets without one paying for them. See the recent Uniswap airdrop.
It is becoming increasingly important to understand that it is no longer possible to avoid disclosing your involvement with virtual/crypto currencies. The virtual currency question being moved front and centre on page 1 of the IRS’ new draft form 1040 puts everyone on alert to be mindful to report all your income.
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