Cryptocurrency taxation has been a complicated issue for regulators and is something all governments want to address. The market for this is expanding rapidly, but with no clear taxation laws. Hence, this has become a major issue for both regulators and taxpayers. The United States Internal Revenue Services (IRS) has already taken the first step, which is to ensure that investors are disclosing crypto holdings when filing taxes, and is now providing greater clarity.
According to an update to the IRS’s FAQ section on cryptocurrency, crypto investors who only purchased digital assets using fiat and did not sell throughout 2020, do not need to report their transactions under the “virtual currency” question.
Last year, the IRS moved the question relating to the use of cryptocurrency by the individual to the front page of Form 1040. The question reads: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”Individuals who made crypto purchases in 2020 were expected to answer “yes” to this.
Greater Clarity
However, question five of the IRS’ updated cryptocurrency FAQ information asks whether an individual who “purchased virtual currency with real currency and had no other virtual transactions during the year” must report said activities in Form 1040. The answer now states:
“If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”
This suggests that investors do not need to report crypto purchases made with US dollars if they haven’t made any crypto-to-crypto trades or sold any of their digital assets for fiat. But if a crypto purchase has been made with other crypto assets or some portion of funds has been sold, the transactions must be reported.
Even though the IRS has been actively trying to clarify the taxation side of crypto, the pace of regulatory innovation in this sector remains slow. As of now, the community is looking up to the new administration that has come to power in hopes of proper regulations. U.S. SEC commissioner Hester Peirce has voiced concerns in this regard and has asked for clear cryptocurrency regulations to remove the uncertainty regarding the status of digital assets in the US.
