IRS Updates Digital Currency Question in Tax Form 1040

Digital currency traders in the United States will be required to file tax returns declaring their “earnings” for this year in the not-so-distant future. With the massive bull run that has occurred from the first quarter of 2020 until recently, it is certain that many traders will have hefty tax bills if they have made the gains.

Last year, the Internal Revenue Service (IRS) updated its Form 1040 to ask questions about virtual assets. However, after some confusion that prompted an official response from the IRS in the FAQ section of its site, the form has been updated for this year.

What does the new form say?

The previous IRS Form 1040 asked, “At any time in 2020, have you received, sold or otherwise acquired any financial interest in a virtual currency?” “

This led to some confusion: US citizens questioned whether buying and holding counted as a digital currency transaction. The IRS clarified that if users only purchased digital currency, it didn’t matter.

This year he rephrased the question to avoid confusion. Now it goes like this:

“At any time in 2021, have you received, sold, traded, or otherwise alienated any financial interest in a virtual currency? “

This new wording clarifies that people only need to answer yes if they have engaged in a digital currency transaction that is considered a taxable event. It is understood that the finalized version of the form will be accompanied by some advice on how to accurately answer the question.

What specific activities would require someone to answer “yes” on the form?

  • Receive digital currencies as a payment method
  • Reception of parachutes
  • Digital currency exchange
  • Sell ​​digital currencies
  • Receive rewards from mining, staking, or hard forks

The importance of declaring virtual assets and paying tax

There are a lot of myths and lies being promoted in the “cryptocurrency” space. Failure to declare digital assets and pay the appropriate taxes on them could have serious consequences, including fines and even jail time.

One of the biggest myths is that digital currencies like BTC are anonymous and not found. This is not true. Public blockchains like Bitcoin are not encrypted. They feature clear text that makes it easy for tax authorities to track, trace and track transactions. Even the main parts mixing services are cut and their operators prosecuted.

The truth is, almost all digital assets are easily traceable. If users ever hope to cash in their earnings in the future or spend large amounts of their digital currencies, this will lead to questions about where the money is coming from. Governments around the world are ending anonymous transactions and requiring digital asset service providers to perform appropriate KYC / AML checks. The era of hiding virtual currency gains is well and truly fading.

Not only that, but as governments and law enforcement find out how blockchains actually work and how they can use them to their advantage to prosecute tax evaders, they will start to do so. It is better to just complete Form 1040 accurately and pay the taxes owed. It’s the smart move for those with the long haul in mind.

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