The crypto question on the income tax form may not be easy to answer (1)

The IRS’s application of cryptocurrency tax evasion appears to be gaining ground, with a yes or no question about virtual currency exchanges now on the front page of its 2020 Individual Tax Form project.

The answers to this question are not so straightforward, given the loopholes in the IRS guidelines for what the agency considers virtual currency, as well as what it considers a tax-triggering event, according to tax specialists in this field.

“While this seems like a very simple question, there are actually a lot of nuances about it,” said Chandan Lodha, co-founder of cryptocurrency wallet and tax management software CoinTracker. “Does this include if you acquired cryptocurrency in a previous year but not this tax year? What if you transfer cryptocurrency between wallets you already own? “

Draft Form 2020 1040, released last week, asks taxpayers whether they have received, sold, traded, or acquired financial interest in a virtual currency. The agency included the question last year, but placed it on the draft Schedule 1 of Form 1040, where individuals can report other income that they would not have put on the main form, such as unemployment benefits, rental income and royalties.

The IRS has increasingly focused on cryptocurrency tax compliance. Last summer, the agency sent letters to thousands of traders suspected of not having reported their assets and issued guidelines on reporting income in October 2019.

Estimates of the share of Americans who own cryptocurrencies vary, with financial information services site putting the number at 14.4% in 2019, while a survey by the cryptocurrency blog CryptoRadar l ‘estimated at 6.2%.

While tax software companies like H&R Block Inc. have already incorporated the cryptocurrency issue into their filing processes, moving it to the first page of Form 1040 means taxpayers and tax preparers can’t not miss it, tax professionals said.

“I think that puts a lot of preparers on their guard,” said Joshua Azran, accountant and founder of Azran Financial in Los Angeles. The IRS, he added, appears to be saying, “We want you to make an active decision as a preparer and as a professional and actually ask the client the question and review it.”

Not that easy

The wording of the question still raises additional questions, said Annette Nellen, professor of accounting at San Jose State University.

“How about you get it as a gift?” It can be argued that you received it, but it has no tax consequences. Do you attach an explanation? she said. “We don’t know everything that ‘yes’ means. “

Earlier this year, the IRS revised a webpage to remove currency used in Fortnite and Roblox video games from its definition of “virtual currency,” a sign that the agency’s own terminology – and by extension, if a taxpayer correctly answers the question of the form – evolves, noted Nellen. She added that she hopes to see additional guidance in future form instructions.

Lisa Zarlenga, a partner at Steptoe & Johnson LLP in Washington, said she was “disappointed” the IRS had not revised the wording of the question to move it to the top of Form 1040, but said tax experts Usually advise customers to check the ‘yes’ box if they have had transactions with the cryptocurrency, whether or not they triggered taxes.

“I would break it down into several questions, so they can see what happened,” said Zarlenga, a former Treasury Department official.

For example, if a taxpayer were to sell virtual currency, the agency could seek earnings, unlike situations where taxpayers simply received it as a gift.

Omri Marian, a professor at the University of California, Irvine School of Law, said it’s clear that taxpayers need to answer yes if they’ve had any interaction with virtual currency, whether or not it triggers a tax liability.

“People can interpret this to suggest that there is something really negative about owning virtual currencies, which shouldn’t be the case,” Marian said. “I would like to see the IRS explain a little bit why it is asking this question this way,” or note that interacting with cryptocurrency does not necessarily mean that a person owes taxes, he added. .

“We are continually looking for ways to revise our forms for optimal use and understanding,” an IRS spokesperson said in an emailed statement, declining to comment further.

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