The First Question on the 1040 Tax Form? Bitcoin.

Trading on cell phone screen.
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In one of the most basic signs of just how mainstream bitcoin and other cryptocurrencies are becoming, the IRS asks anyone filing this year’s 1040 income tax return about them almost before anything else. 

In fact, the question about whether tax filers have a financial interest in any virtual currency is the first thing they’ll encounter after they enter their name and address.

Key Takeaways

  • The IRS has included a much more prominent question about cryptocurrencies on the 1040 tax return this year.
  • The change is likely meant to crack down on tax evasion, experts say.
  • Taxpayers are required to report gains or losses on bitcoin and other cryptocurrencies when they are bought, sold, or traded.

Last year, when taxpayers filed their 2019 returns, the question on cryptocurrencies was relegated to the accompanying Schedule 1, which is used for reporting certain adjustments or additional income such as unemployment benefits. But this year’s new prominent position on the 1040 itself is likely part of an attempt to crack down on cryptocurrency tax evaders, tax experts say. 

“By making the question prominent, it helps the IRS build cases against deliberate fraud involving virtual currencies,” Garrett Watson, a senior policy analyst at the Tax Foundation, a nonprofit tax policy research firm, wrote in an email.

Just like last year, the question asks taxpayers:  “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” and then includes “yes” and “no” checkboxes. Taxpayers are required to check “yes” if they engaged in a transaction, but not if they only held a virtual currency in an account or wallet. 

Although it’s unclear how many taxpayers report virtual currency transactions, the “vast majority” of people in the U.S. who should be are not, according to Pat Larsen, co-CEO of ZenLedger, a cryptocurrency tax preparation software company founded in 2018. The clear-cut and upfront question on the 1040 form is likely to get more people to comply with reporting gains or losses

“Forgetting that crypto needs to be reported is very different than checking “no,” Larsen wrote in an email. “Tax professionals preparing tax filings will have to get an affirmative ‘yes/no’ from each of their clients.”

The IRS defines virtual currencies as cryptocurrencies and digital currencies that are used as a medium of exchange. When asked about the new question placement, an IRS spokesman pointed to IRS Commissioner Chuck Rettig’s testimony to Congress Tuesday and the agency’s Frequently Asked Questions webpage on virtual currencies. Statistics on virtual currency transactions weren’t available, the spokesman said. 

“We continue to be very active in emerging areas such as virtual currency,” Rettig said, according to prepared remarks. “The IRS has been working to ensure taxpayers with virtual currency transactions understand the tax laws governing virtual currency and meet their tax obligations.”

Trading apps like Robinhood and cryptocurrency exchanges like Coinbase have made sure “tens of millions of Americans hold crypto now,” Larsen wrote. “The IRS cannot ignore the capital gains and interest income from a $1.5T asset class.”