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IRS Releases Draft 1040 Instructions Adding Clarity To The Infamous Virtual Currency Question

On Oct 23, 2020, the IRS released instructions to the draft 2020 Form 1040 which contains the infamous virtual currency question ᠆᠆ At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in virtual currency? ᠆᠆ on the front page.

According to the newly released draft instructions, taxpayers aren’t required to check “yes” for the crypto question, if they only held cryptocurrency or transferred them between wallets they own during 2020. 

“A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control” 

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During the 2019 tax filing, many taxpayers and tax practitioners were confused if they had to check “yes” if someone only held virtual currency in a wallet without making any transactions and/or moved funds between wallets owned by the taxpayer. 2020 draft instructions clarify the answer to this. Also, privacy-conscious hodlers would also welcome this added language because they can safely check “No” this question (unless they make any trades during 2020).  

It should also be noted that the instructions provided by the IRS on how to answer the virtual currency question are far from being comprehensive. For example, we still don’t know whether a taxpayer who owns virtual currency through a pass-through entity needs to check “yes” for the question. What exactly covered by the “financial interest” portion of the question is still subject to interpretation.   

Finally, the publication of the draft instructions with the added clarity on the virtual currency question suggests that this question will most likely end up on the final Form 1040. 

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.

Source: Forbes – Money

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