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Virtual Currency Gains Prominence On 2020 Tax Return



Virtual Currency Gains Prominence On 2020 Tax Return

The 2019 Schedule 1 (Form 1040), Additional Income and Adjustments to Income, included a new question at the start of the form:

“At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”

On August 18, 2020, the IRS released the draft 1040 for 2020 and it shows this question has moved to page 1 of Form 1040 right below where you put your name and address.

For 2019, this seemed like an odd question since few individuals out of 150 million have any virtual currency (11% per a 2019 article by CoinTelegraph), and there are better questions to ask that affect far more people and potential income. For example, why not ask: ”Did you receive any funds from any web-based or Internet-based activity?”

1040 Income Tax Return 2020

1040 Income Tax Return 2020

And either question should have follow up questions, such as:

If yes, is the income reported on the return?

If yes, where?  If no, explain why not, with space provided to do so.

My question would cover virtual currency, renting out property via a web-based platform but not receiving any Form 1099, earning ad revenue from your website, selling goods on eBay or Etsy or similar site.

The form instructions are not yet out but hopefully the IRS will explain the question better for 2020. Some questions and issues:

  • What is “virtual currency” given IRS lack of clarify on this?
  • Why doesn’t IRS use “convertible virtual currency”? Per Notice 2014-21 and other statements, it seems that this is what the IRS is focused on.
  • What if you only moved your VC from one wallet to another, should you check yes?
  • What if you receive VC by gift or something else with no tax consequence? Or receive it as wages and reported it on the wage line?
  • Is IRS expecting a “yes” answer to mean that VC shows up on Schedule D or Form 8949
  • Should you attach an explanation if you check yes but have no reporting obligation?
  • What if a passthrough entity owns it? You need to ask the entity apparently?
  • What if your VC had a fork or airdrop and you didn’t know that?

In February 2020, the IRS modified its answer to a website question “What is Virtual Currency?” Between October 2019 and February 11, 2020, it stated “Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency.” [See IRS website at 1/14/20 from The Wayback Machine.] Afterward, the gaming currency was removed. The IRS explanation was posted on a different website (2/14/20) to note that the change, which they don’t describe on this website, was done to “lessen any confusion.”  But Roblox and V-Bucks and likely other game currency seems to be convertible virtual currency as you need it to play the game and you get it and can redeem it using USD. So confusion, arguably, is increased with the change.

What do you think? Annette Nellen.

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Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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