IRS Intends to Make Clear It Wants to Tax Crypto Deals

Millennial Man Trading Cryptocurrency

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The IRS tweaked the cryptocurrency question on the draft of its 1040 income tax form for 2021 to make clear it wants to collect tax on virtual currency transactions—but not holdings—in the $2 trillion market.

In the draft 1040 form released last week on the IRS website, the cryptocurrency question at the top of the form now reads, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” Last year, the IRS moved the cryptocurrency question from Schedule 1 to the very top of the 1040 to make sure people didn’t miss it. Not everyone uses Schedule 1, which is for reporting certain adjustments or additional income such as unemployment benefits. The old wording asked, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Taxpayers last year were required to check “yes” if they engaged in a transaction, but not if they only held a virtual currency in an account or wallet. That is still true, but the new wording clarifies that intent. Some had been alarmed by the original question because it implied that the IRS could build a database of everyone who had acquired crypto assets. The concern reflects the collision of crypto’s privacy aspects with the government’s eagerness to collect revenue as it seeks to close the $1 trillion-per-year tax gap and pay for President Joe Biden’s spending plans. 

The Treasury said in a May report that the IRS needs funding for new tools to penetrate the secrecy of the cryptocurrency market to lessen its attraction for tax evaders and criminals. It also urged that businesses be required to report receipts of virtual currency with fair market value exceeding $10,000, as is the case with cash.

“Going forward, it seems like you only have to check ‘Yes’ if you have a taxable crypto transaction,” said Shehan Chandrasekera, head of tax strategy at CoinTracker, which offers cryptocurrency portfolio and tax management tools, in an email. “Last year's instructions on how to answer the question were very limited.” 

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Article Sources

  1. IRS. “2021 Form 1040.” Accessed July 29, 2021.

  2. IRS. “2020 Form 1040.” Accessed July 29, 2021.

  3. U.S. Treasury. “The American Families Plan Tax Compliance Agenda.” Accessed July 29, 2021