IRS Adds Cryptocurrency Question To Tax Form 1040

KEY POINTS

It asks taxpayers if they have received, sold, sent, exchanged or acquired virtual currency in 2020
The proposed change comes as the agency continues to ramp up security of cryptocurrencies
In a lawsuit with Coinbase, the IRS testified that only 807 individuals reported their crypto earnings in 2015

The new Form 1040 from the Internal Revenue Reserve (IRS) will have a question asking taxpayers if they have received, sold, sent, exchanged or acquired virtual currency in 2020.

The IRS shared a draft of the new form on its website. The question about "virtual currency" appears in the middle of the form. IRS defines virtual currency "as a digital representation of value that functions as a medium of exchange, a unit account, and/or as a store of value." The underlying differentiation is that it does not have any legal tender status. Cryptocurrency, according to IRS, is a type of virtual currency that uses cryptography for transactions, which are recorded on a distributed ledger such as the blockchain.

The question is added as part of the IRS' efforts to ramp up scrutiny of cryptocurrencies, news outlet Fortune reported. The agency had previously focused on criminal activities related to cryptocurrency and on taxpayers who failed to report their profits and therefore failed to file correct taxes.

Many Americans do not report their income from cryptocurrencies. For example, in a lawsuit with Coinbase, the IRS testified that only 807 individuals reported their earnings in 2015.

According to the Wall Street Journal, the cryptocurrency question in Form 1040 could be a trap. Apart from the question being in a prominent spot just under the taxpayer's personal information, it would make it much harder for the taxpayer to ignore or claim ignorance of the rules. The publication noted that people sign their tax forms under penalty of perjury and juries would side with the IRS if the taxpayer has lied.

A similar strategy was done by the IRS when it asked taxpayers about offshore financial accounts, which eventually revealed that many Americans were hiding money abroad.

The IRS tactic might cause friction with the cryptocurrency industry, which had lobbied for exemptions for transactions below $200. , to which the IRS said only an act from the Congress could possibly allow such exemptions, Fortune reported.