Form 1040 may look similar to last year’s return, but there’s one key difference that’s attracting attention: a question about cryptocurrency.
As I reported late last year, early drafts of Form 1040 reflected a new question on the top of Schedule 1, Additional Income and Adjustments to Income (downloads as a PDF). Schedule 1 is used to report income or adjustments to income that can’t be entered directly on the front page of form 1040.
The new question made it onto the final version of Schedule 1:
The question asks: At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
The placement of the question is important. I believe the question is intended to be so conspicuous that it makes it difficult for any taxpayer to argue that they didn’t know that it was necessary to report cryptocurrency transactions.
The Internal Revenue Service (IRS) has made no secret of the fact that it believes that taxpayers are not properly reporting cryptocurrency transactions. An IRS dive into the data showed that for the 2013 through 2015 tax years, the IRS processed, on average, just under 150 million individual returns annually. Of those, approximately 84% were filed electronically. When IRS matched data collected from forms 8949, Sales and Other Dispositions of Capital Assets, which were filed electronically, they found that just 807 individuals reported a transaction using a property description likely related to bitcoin in 2013; in 2014, that number was only 893; and in 2015, the number fell to 802.
But… so what? If you skip over the question or answer it wrong, you can still claim that you made a mistake, right?
Here’s the thing. Even though the question is new, this kind of question certainly isn’t. Tax professionals have watched taxpayers struggle before when answering a similar question about offshore accounts and interests at the bottom of Schedule B. This one:
The IRS can and has taken the position that willfully failing to check the box related to offshores accounts and interests on Schedule B can form the basis for criminal prosecution. Failing to check the box by accident can still result in expensive headaches and draconian penalties. I fully expect a similar result when it comes to cryptocurrency.
So why all the fuss over this new question? The IRS has made cryptocurrency compliance a priority. Last year, the IRS mailed letters to more than 10,000 taxpayers who might have failed to report income and pay the resulting tax from virtual currency transactions or did not accurately report their transactions. This wasn’t unexpected since the IRS campaigns announced in 2018 that they were making noncompliance related to the use of virtual currency one of their targeted compliance campaigns.
In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency like Bitcoin and Ethereum will be treated as capital assets, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to gains or losses. (You can read more on the taxation of cryptocurrencies here.)
It’s clear that the IRS is getting serious about cryptocurrency reporting. If you have questions about how and what to report, don’t stay silent: ask your tax professional for more information.