The United States Internal Revenue Service (IRS) has lately been focusing its efforts towards creating a taxation regime for digital assets. As such, the agency is looking to clamp down on cryptocurrency owners who fail to file tax returns related to their crypt dealings.
As of now, the IRS has released a revised version of draft instructions for those filing crypto taxes in 2021. The new draft clarifies that cryptocurrency purchases count as virtual currency transactions.
Clarifying the Crypto Question
Per the updated instructions, individuals who made crypto purchases in 2020 must answer “yes” to the crypto question on 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?”
Thos who just held on to their crypto assets and merely transferred it in between wallets they own or control can answer “no” to this question.
Prior to this, a draft instructions page made public back in October looking to clarify when to answer “yes” did not mention purchases. It included transfers (including from airdrops and hard forks), sales, and trades, but failed to explain what the IRS means when it says “acquire any financial interest.” The revised draft, which was published on December 31, 2020, has addressed this.
The revisions were first pointed out by Shehan Chandrasekera, Head of Tax Strategy for tax software firm CoinTracker. He has asserted that clarification is important.
“‘Financial interest’ is a cover-all type of category. We still do not know how narrowly or broadly one should think about it. In my opinion, the inclusion of crypto purchases made things more clearer for people who were on the fence,” he told media outlet Decrypt.
He further added that despite clicking “yes” on the crypto question, there’s “nothing to report on any forms because buying crypto in USD is not a taxable event.” In simplers terms, anyone purchasing cryptocurrencies are not required to pay taxes because of the purchase.
However, the IRS doesn’t seem to be concerned with the volume of purchases, for now, its priority seems to be keeping track of whether an individual possesses cryptocurrencies. But those who made money trading must calculate their capital gains or losses and report it. While Capital gains are taxed, capital losses can reduce what’s owed.
Also, those who received cryptocurrencies as compensation must report it as income. The IRS has been quick when it came to introducing the crypto question in form 1040. The question was introduced last tax season and recently, the regulator moved the question up top, right below the boxes for the filer’s name and address.