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The US tax agency has made it clear who should answer “yes” to a question about the cryptocurrency business included in the draft 1040 form for federal income tax.
As reported in September, the Internal Revenue Service (IRS) revealed it would reposition an application on Form 1040 for 2020 which will require returnees to indicate whether they “acquire[d] any financial interest in any virtual currency ”during the fiscal year.
In its recently published series of draft instructions, the IRS now explains that taxpayers should answer yes if they were selling cryptocurrency, trading cryptocurrency for goods or services, or trading cryptocurrency for property, including other cryptocurrencies.
It also stipulates that respondents must answer “yes” if they have received free cryptocurrency, even via airdrop or hard fork.
Airdrops are free distributions of cryptocurrency to users or potential users, often in an attempt to kickstart the adoption of a new currency.
Hard forks, updates to the code of a blockchain that require users to upgrade 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, owners of the original coins can also automatically receive the same number of assets on the new chain. For example, holders of 10 bitcoins automatically owned 10 bitcoins in cash after a hard fork in 2017.
The IRS draft guidance also makes it clear that taxpayers don’t have to check yes if they simply held cryptocurrency in 2020 or moved from one wallet to another they own.
The draft is likely to remain standing unless there are “unforeseen problems” or new regulations that require changes, the IRS said in the document.
With the paucity of IRS guidelines on how to pay much-criticized crypto taxes in recent years, the clarification could be a relief for 1040 returnees. The tax agency has been a bit heavy-handed at times, ignoring their watchdog’s advice when sending “soft” warning letters extensively demanding unpaid or incorrectly submitted crypto taxes.
