The New 1040 IRS Tax Form Now Targets Cryptocurrency
The Internal Revenue Service is starting to turn its attention to Cryptocurrencies and tax rules on bitcoin, ether or other digital currencies are changing. In fact IRS plans to change the standard 1040 form by putting this question on the front page:
At any time during 2020, did you sell, receive, send, exchange or otherwise acquire any financial interest in any virtual currency? The taxpayer must check the box “Yes” or “No.”
The crypto question first appeared on the 2019 tax form, but on a part of the return that not all filers had to answer.
“This placement is unprecedented and will make it easier for the IRS to win cases against taxpayers who check ‘No’ when they should check ‘Yes,’” says Ed Zollars, a CPA with Kaplan Financial Education who updates tax professionals on legal developments.
By changing the position of the crypto question and having all 1040 filers respond to it, the IRS is making it much harder to claim ignorance of the rules. The change to the crypto question and other recent actions shows the IRS is taking cryptocurrencies seriously as a threat to the tax system, whether the noncompliance is by an techy individual or by sophisticated international criminals.
The agency is right to be worried about noncompliance, say specialists. Coinbase, a leading cryptocurrency exchange and custodian. They reported 35 million total accounts as of July. Chainalysis, a firm that provides crypto investigations software, estimates there were at least 3.1 million active accounts using the popular bitcoin currency in the U.S. between June 2019 and July 2020.
Dan Hannum, chief operating officer of ZenLedger, a crypto tax-prep software firm, thinks a total of fewer than 150,000 crypto owners filed required tax forms for 2017, 2018, and 2019, based on his industry knowledge.
“Buying a sandwich with cryptocurrency shouldn’t be a taxable event,” says Sean Cover, a New York City cryptocurrency holder who works in finance for a nonprofit group. He says that in 2017 he had more than 500 transactions on several platforms, and it took him 10 hours to prepare his crypto tax forms even though he paid for special software.
Like some members of Congress, Mr. Cover supports a $200 threshold before crypto transactions would need to be reported. The IRS says it’s up to Congress to change the law.
Meanwhile, the IRS is forging ahead with other crypto compliance measures going as far as rewarding code-breakers with over $600,000 for cracking codes for privacy coins like Monero that attract illicit activity because they claim to be untraceable.
He adds, “Based on what we’re seeing, people are starting to get scared.”