The IRS is setting a tax trap for cryptocurrency investors in 2020

The U.S. Internal Revenue Service (IRS) is making it harder for taxpayers to hide cryptocurrency gains — intentionally or not — by adding a new question to the top of the new 2020 1040 tax form.
The new tax form question, released last week, is: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" The only option is to mark yes or no.
Tax professionals warn that if you answer incorrectly, you could find the IRS is rooting out tax dodgers and putting you in hot water.
“When you sign the form, if you make the wrong choice, you’re under penalty of perjury,” said Ryan Losi, CPA and executive vice president of tax accountant PIASCIK. “The IRS is just collecting data, changing the form to make it clear that you did or didn’t do it, and setting traps so the crypto tax hammer could fall at any time in the next few years.”

Image source: Getty Images

The IRS has made its position clear

Since 2014, the IRS has considered virtual currency to be a capital asset that must be treated as property for tax purposes. Similar to stocks or bonds, any gains or losses from the sale or exchange of cryptocurrencies are taxed as capital gains or losses. Any income generated from Bitcoin mining or other cryptocurrencies is also taxable.

But the Internal Revenue Service (IRS) has been investigating for years to determine how many cryptocurrency investors are underestimating their cryptocurrency holdings.

In 2018, Coinbase, the largest cryptocurrency custodian, was forced to disclose information about 13,000 user accounts after being summoned by the IRS. The IRS also sued to force Bitstamp to release more information about a taxpayer who requested a $15,475 tax refund on an amended return.

The IRS included the same question on 2019 tax returns, but it was at the top of Schedule 1, which is used to report certain additional income or adjustments to income, said Lewis Taub, a CPA and tax director at Berkowitz Pollack. The problem, he said, is that not many people file Schedule 1 with their returns, so the IRS moved the question directly to the first page of the return this year.

(Photo: Getty Creative)

“I believe the IRS is treating omitted virtual currency transactions in the same manner that it seeks to identify U.S. taxpayers’ foreign bank accounts,” Taub said. “By asking the question at the top of page one of the income statement, the IRS is making it clear that any income from virtual currency gains or losses must be reported on the income statement.”

The supplementary note to tax form 1040 explains how and when virtual currency holdings and transactions must be reported.

But cryptocurrencies can be tricky because some people use their virtual currency accounts as payment accounts, such as buying a Starbucks latte with Bitcoin. However, if you complete the purchase using the proceeds from your cryptocurrency investment, it will be a taxable event.

However, simply holding virtual currency does not mean you need to pay taxes on it.

“If you acquire virtual currency and you don’t spend it or convert it into another currency, there’s no trigger for tax purposes,” he said. “It’s gains that people never realize.”