Crypto owners are shocked to see that the IRS has revised the 1040 tax form for 2020 to include the question:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Yes or No”. 1
This question appears on the top of Form 1040 immediately after your name and address.
Every taxpayer must answer this question, and it is causing a lot of fear.
The IRS had a similar question in 2019 on Schedule 1 of Form 1040.
However, only taxpayers filing Schedule 1 had to answer the question.
Neither The Tax Law Nor The IRS Regulations Have Defined Virtual Currency For Crypto Owners
Virtual currency is not defined in the tax law nor the IRS regulations.
The IRS started using the term virtual currency in 2014. 2
The new 2020 Form 1040 Instructions explain:
“Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange…. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.” 3
This definition classifies all cryptocurrencies as virtual currency.
Are there other fish caught in this net?
You bet there are!
And it is vital that all crypto owners understand a crucial point when it comes to how the IRS defines cryptocurrency.
What All Crypto Owners Should Know About The IRS Definition Of Virtual Currency
The same definition the IRS is classifying for cryptocurrencies also classifies: frequent flyer miles, grocery store loyalty cards, and credit card reward points are all forms of a digital representation of a store of value.
These are all forms of virtual currency.
What Do These Various Forms Of Virtual Currency Mean For Crypto Owners?
Almost every taxpayer has a financial interest in some form of virtual currency, by the IRS definition.
Meaning, almost everyone should answer YES to this question, even if you don’t own cryptocurrencies.
By elevating the virtual currency question to the start of Form 1040, it is causing crypto owners a lot of fear. When you sign your tax return, you are swearing:
“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
Why Is Answering The New Form 1040 Question Terrifying Crypto Owners?
If you answer the virtual currency question falsely, you could be charged with perjury.
Lawyers call this a “perjury trap.”
Yet, most observers feel the IRS has not provided adequate guidance for taxpayers to know how to report their cryptocurrency income, especially in light of DeFi innovations.
The Government Accounting Office (GAO) asserted that the IRS could do more to help taxpayers comply. 4
Is There More Than One Perjury Trap For Crypto Owners?
Yes, there is!
Another perjury trap is question 7a on Schedule B of Form 1040, which asks:
“At any time during 2020, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions Yes or No.” 5
Foreign crypto exchanges appear to qualify as a financial account described in this question. 6
In February 2020, the same GAO report recommended that the IRS & FinCEN make a statement about applying foreign account reporting requirements to virtual currency.
FinCEN agreed with this recommendation.
What did the IRS do?
The IRS had no comment.
Where Is All The Much-Needed Regulation For Crypto Owners?
As of today, December 16, 2020, neither FinCEN nor the IRS have provided additional guidance.
However, the absence of guidance for crypto owners is not a valid excuse for failing to obey the law – ignorantia juris non excusat.
What Does Failure To Report Foreign Accounts Mean For Crypto Owners?
Failure to report foreign financial accounts when required is a $10,000 penalty per account per year.
The conservative approach is for a taxpayer to report foreign crypto accounts on the FBAR FinCEN Form 114 and IRS Form 8938 (FATCA).
The escalation of the virtual currency question without adequate IRS guidance is causing taxpayers to be anxious.
Many crypto owners are asking if they need to fix past tax returns.
Donnelly Tax Law Has Solutions For Crypto Owners, No Matter What Your Budget
The IRS is already cracking down on crypto owners, and we have solutions available to empower all crypto owners, no matter what your budget.
Everything Crypto Owners Need To Amend And File Past Crypto Tax Returns
- You can learn how to amend and file your past crypto tax returns with our downloadable examples and templates using the Crypto Tax Fixer package.
- Crypto Owners can bulletproof their crypto tax returns to protect themselves from the IRS by scheduling a one-on-one appointment to discuss your crypto tax situation.
A good crypto tax return involves not just general tax preparation skills; you have to have accounting skills to do the reconciliation of all the trades.
A good crypto tax preparer also needs to have legal skills because the anti-money laundering forms are law-oriented.
When we do a tax return at Donnelly Tax Law, we call it a bulletproof crypto tax return.
Not only do we report all the income, but we also report all the anti-money laundering forms.
We report any Ponzi scams or financial scams where you lost money because you can itemize the loss and reduce your taxes.
If you have ICOs and dead coins and junk coins that went nothing, we can declare a loss on those and bring in some savings.
For most clients who come to me, we have to go back and fix a couple of years’ worth of returns.
So we do a tax amnesty form.
Because if you report the anti-money laundering forms after the deadline, which is the same day as taxes are due, it’s a $10,000 penalty.
Schedule a one-to-one consultation today at Donnelly Tax Law.
Crypto Tax Audit Defense Membership Is The Best Investment For At-risk Crypto Owners
- If you are a crypto owner and haven’t protected your most significant bullish assets with crypto tax audit defense, give us this opportunity to enlighten you with just three reasons why you should.
1 Draft 2020 Form 1040 <https://www.irs.gov/pub/irs-dft/f1040–dft.pdf > released August 18, 2020.
2 IRS Notice 2014-21 < https://www.irs.gov/pub/irs-drop/n-14-21.pdf>
3 Draft 1040 Instructions < https://www.irs.gov/pub/irs-pdf/i1040gi.pdf >, released December 15, 2020, p 15.
4 GAO, “Virtual Currencies: Additional Information reporting and Clarified Guidance Could Improve Tax Compliance. < https://www.gao.gov/products/gao-20-188 >2/12/2000, GAO-20-188
5 Schedule B < https://www.irs.gov/pub/irs-pdf/f1040sb.pdf>
6 18 CFR 1010.350 (c)(3)