Virtual Currency Update, Including a New Question on the 2019 Form 1040

During 2019, as part of a wider effort to assist taxpayers and to enforce tax laws in a rapidly changing area, the Internal Revenue Service issued two pieces of guidance for taxpayers who engage in transactions involving virtual currency.

Expanding on guidance from 2014, the IRS issued additional detailed guidance to help taxpayers better understand their reporting obligations for specific transactions involving virtual currency. The new guidance includes Revenue Ruling 2019-24 (PDF) and frequently asked questions (FAQs).

The new revenue ruling addresses common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork, whether followed by an airdrop or not. The terms, hard fork and airdrop, are defined in the revenue ruling. In addition, a set of FAQs addresses virtual currency transactions for those who hold virtual currency as a capital asset.

The new guidance supplements the guidance the IRS issued on virtual currency in Notice 2014-21 (PDF). In Notice 2014-21, the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes. The Notice explained, in the form of 16 FAQs, the application of general tax principles to the most common transactions involving virtual currency. The frequently asked questions (FAQs) issued in 2019 expand upon the examples provided in Notice 2014-21 and apply those same longstanding tax principles to additional situations.

The IRS is aware that some taxpayers with virtual currency transactions may have failed to report income and pay the resulting tax or did not report their transactions properly. The IRS is actively addressing potential non-compliance in this area through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.

For example, in July of this year, the IRS announced that it began mailing educational letters to more than 10,000 taxpayers who may have reported transactions involving virtual currency incorrectly or not at all. Taxpayers who did not report transactions involving virtual currency or who reported them incorrectly may, when appropriate, be liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.

As another enforcement measure, the IRS has included a new question on the 2019 Form 1040, Schedule 1 to be completed by individual taxpayers. The question asks the taxpayer to respond “Yes” or “No” to the question, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Please contact your BMSS tax professional if you have any questions about virtual currency transactions that have occurred or are contemplated.