Tax Payers Needn’t Disclose Merely Holding Crypto: IRS Draft 2020 Guidance

The U.S. tax agency has clarified who needs to answer “yes” to a question over cryptocurrency activity included in the draft 1040 federal income tax form.

As reported in September, the Internal Revenue Service (IRS) revealed it would reposition a question on the 1040 form for 2020 that will require returnees to indicate if they “acquire[d] any financial interest in any virtual currency” over the tax year.

In its recently published set of draft instructions, the IRS now explains that tax payers would need to answer in the affirmative if they sold any cryptocurrency, exchanged cryptocurrency for goods or services, or exchanged cryptocurrency for property including other crypto assets.

It also sets out that respondents must answer “yes” if they received any cryptocurrency for free, including via airdrops or hard forks.

Airdrops are free distributions of cryptocurrency to users or potential users, often in a bid to kick off adoption of a new coin.

Hard forks, updates to a blockchain’s code that require users to update to the new version, sometimes arise in the division of a chain into two competing but similar networks, each with its own cryptocurrency.

When such a fork occurs, holders of the original coins may also automatically receive the same number of assets on the new chain. For example, holders of 10 bitcoin automatically owned 10 bitcoin cash after a hard fork in 2017.

The IRS draft guidance also makes clear taxpayers need not check yes if they merely held cryptocurrency in 2020, or moved it from one wallet to another owned by them.

The draft is likely to stand unless there are “unexpected issues” or new legislation requiring changes, the IRS said in the document.

With the IRS’ paucity of guidelines on how to pay crypto taxes much criticized in recent years, the clarification may come as some relief to 1040 form returnees. The tax agency has been somewhat heavy-handed at times, ignoring its own watchdog’s advice when sending out “soft” warning letters broadly inquiring about unpaid or incorrectly filed crypto taxes.