The US Internal Revenue Service (IRS) seems to be stepping in to get a hold of the cryptocurrency industry as the regulator has published additional instructions for crypto enthusiasts filing tax returns.
The question reads: At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Taxpayers who will be filing the form will have to answer the question correctly.
Per the latest draft instructions, taxpayers will also need to answer whether they sold any cryptocurrency, exchanged cryptocurrency for goods or services, or exchanged cryptocurrency for the property including other crypto assets.
That’s not it, the IRS also wants information about any free cryptocurrency that is received via airdrops or hard forks, and taxpayers must answer “yes” if they did.
Airdrops are basically free gifts from a project to its loyal community to spark the adoption of a new coin.
Meanwhile, Hard forks are updates to a blockchain’s code that requires users to update to the new version. Sometimes this divides the chain into two competing but similar networks, each with its own cryptocurrency.
The IRS’s draft also highlights that taxpayers need to check yes even they simply held cryptocurrency in 2020 or transferred it in between self-owned wallets.
The announcement also adds that the draft instructions will be officially implemented unless some “unexpected issues” or new legislation requiring changes surface in the future.
The added clarification would be a great relief for the 1040 form returnees as prior to this it was still ambiguous what “acquiring a financial interest in virtual currency” defined.
IRS getting involved in Crypto
Besides detailing the tax filing process, the IRS has also been deeply involved with the cryptocurrency space lately.
The regulator has been spending a lot of resources on developing tools that can be used to track even private cryptocurrencies. It offered a whopping $625,000 bounty for anyone who’d be able to penetrate the untraceable privacy coins Monero (XMR) and also trace transactions on the lightning network for Bitcoin.
Around 22 different firms had submitted applications for prototypes of the solution that would enable the tracing of these various networks. The contract was awarded to analytics firm Chainalysis.