The IRS is taking steps to involve virtual currency in taxpayers’ tax returns. The IRS has announced a compliance measure for taxpayers who engage in virtual currency like bitcoin. A checkbox on Form 1040 will ask taxpayers about financial interests in virtual currency. The checkbox appears on the second draft of the 2019 Form 1040 at the top of Schedule 1, which taxpayers use to report income or make adjustments to income that cannot be entered directly on the front page of form 1040.
The question asks “at any time during 2019, did you receive, sell, send or exchange or otherwise acquire any financial interest in any virtual currency?”. The IRS added the checkbox to help improve compliance from taxpayers and to remind them to report their cryptocurrency transactions. Forgetting to mark the box could potentially lead to penalties or interest on taxes that may be owed due to the virtual currency, depending on how the IRS enforces the compliance.
The IRS also issued guidance for taxpayers engaging in virtual currency transactions. The first guidance, the Revenue Ruling, focuses on the tax treatment of a cryptocurrency hard fork. The second guidance deals with the frequently asked questions on the IRS’s website. The guidance in the Revenue Ruling deals with hard forks with cryptocurrency. The FAQ section clarifies how the IRS is treating virtual currency. The IRS has already confirmed that virtual currency is to be treated as a capital asset if it can be converted to cash. This means capital gains rules apply to any gains or losses on the sale of virtual currency and will be reported on Schedule D. If you transfer the currency from a wallet, address or account belonging to you to another wallet or account that belongs to you, then the transfer is a non-taxable event. The IRS also clarified that the receipt of virtual currency in exchange for performing services, whether or not you’re performing them as an employee, qualifies as income. Virtually currency received by an independent contractor for performing services constitutes as self-employment income and is subject to the self-employment tax. The same result is true if you pay for services or goods using virtual currency. If you receive virtual currency as a gift, you will not immediately recognize income. You will only recognize income when you sell, exchange, or otherwise dispose of the virtual currency.
The FAQs on the IRS’s website also emphasize that taxpayers are required to maintain excellent records to establish positions taken on tax returns. Taxpayers should keep and maintain their records documenting all their receipts, their sales or exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.
If you deal with virtual currency and need tax help, Polston Tax can help. Our team stays up to date on all the recent tax changes and can help you stay compliant with the IRS. Give us a call at 844-841-9857 or click below to schedule a free consultation with our office.