2020 FINAL IRS Virtual Currency Transaction LIST

Everybody's favorite crypto tax question

The IRS issued the final instructions for answering everybody's favorite tax question:

"At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

• Is it good news or bad news?
• Are the final instructions better than the draft?
• What transactions count as a YES and which ones do not?
• What changed from the draft version?

All great questions of course. 

This blog complements 2 previous blogs below for both 2019 and 2020 tax years. In those blogs we covered brain teasers and gotchas about the IRS virtual currency question. Refer back to these for in depth coverage on the entire topic. 

A Few Gotchas: The 2019 IRS Virtual Currency Question

A Few Gotchas: The 2020 IRS Virtual Currency Question

The 2020 IRS Virtual Currency Question asks:

"At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

The DRAFT version of the 1040 instructions included the following list of transactions:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork;
• An exchange of virtual currency for goods or services;
• A purchase or sale of virtual currency;
• An exchange of virtual currency for other property, including for another virtual currency; and
• An acquisition or disposition of a financial interest in virtual currency."

The FINAL version of the 1040 instructions included the following list of transactions:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
• An exchange of virtual currency for goods or services;
• A sale of virtual currency;
• An exchange of virtual currency for other property, including for another virtual currency; and
• A disposition of a financial interest in virtual currency."

These two transaction types were removed from the DRAFT:

• A purchase of virtual currency
• An acquisition of a financial interest in virtual currency

Notice the red colored coded words in the draft were removed and the purple indicates the remaining part of the draft included in the final instructions.

Buys Only = NO Answer?

Does this mean if you only purchase crypto and don't sell you can answer NO? It seems like you could answer NO but that does NOT appear correct. How is this possible?

Here is the question again,

"At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

• Acquire = purchase therefore, even though "purchase" was removed from the transaction list it's still in the question.
• Furthermore, "An acquisition of a financial interest" was removed from the transaction list, but almost the exact same wording is in the question, "did you...otherwise acquire any financial interest."

(BTW as a side note you could own an interest in a partnership. That partnership could acquire crypto, but there is no requirement to disclose it to the partners. See where the gotcha comes in. You could answer NO, yet the partnership owns crypto and indirectly you own crypto too.)

Relegated to YES

As we discussed in the two aforementioned blogs on the topic (please read to get the full picture), there is NO upside to figuring out a clever way to answer NO. If you have crypto you are relegated to answering YES unless you really don't have crypto. 

Good luck and remember your goal is a always a Crypto Bullseye™.

Yours in Crypto, 

Kirk Phillips, CPA, CMA, CFE, CBP

DISCLAIMER
The information in this newsletter can not be construed as tax advice because tax advice can only be dispensed with an official engagement letter.