The Internal Revenue Service (IRS) just released a draft of a revised Form 1040, Schedule 1 highlighting a new compliance measure moving forward proving cryptocurrency enthusiasts can’t avoid Uncle Sam. After all, that “yearly April reunion” rolls around rather quickly.
The new proposed Form 1040, Schedule 1 prominently displays the following question:
At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
In response to this move by the IRS, Senior Contributor at Forbes, Kelly Phillips Erb expressed concern that taxpayers who manually file their taxes might miss this important question if they don’t otherwise have to fill out Schedule 1. While there is sufficient reason to raise such a concern, she illustrates a minority scenario; According to the IRS, 90% of people file their tax forms electronically.
It was only a matter of time before the IRS would attempt to broadly capture at yearly tax time individuals who buy, sell or otherwise acquire cryptocurrency. Methods of otherwise acquiring cryptocurrency could include mining, successfully completing bounties, or receiving airdrops.
Even though the Commodities and Futures Trading Commission has declared Bitcoin and Ethereum as commodities, for the purposes of federal tax, the IRS treats cryptocurrency as property.
From a technical standpoint, it’s often repeated that, “If You Don’t Own Your Keys, You Don’t Own Your Crypto” which raises a very interesting point: cryptocurrency investors who store their crypto on centralized exchanges, don’t technically own their crypto, the exchanges do. It makes for a very interesting basis for being exempt from tax liability. In the coming years, I fully expect to see a landmark case in IRS Tax Court on this issue.
The IRS acknowledges the cryptographic importance that virtual currencies rely on as shown in the following definition on their own website, “Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain, DAG, or Tempo.”
Keep an eye on early 2020 to see what the finalized Form 1040, Schedule 1 looks like, and, of course, file your taxes accordingly.