IRS Update on Virtual Currency for 2020 Individual Income Tax Returns

The IRS defines virtual currency as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency (i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance), but it does not have legal tender status in any jurisdiction.” Notice 2014-21, 2014-16 IRB 938.

In 2014, the Internal Revenue Service (IRS) issued guidance explaining that virtual currency is treated as property for Federal income tax purposes. This guidance also provides examples of how longstanding tax principles relevant to property transactions apply to virtual currency. Notice 2014-21.

The IRS recently issued additional guidance related to individual taxpayers reporting virtual currency information on their Form 1040, U.S. Individual Income Tax Return. Specifically, the 2020 Form 1040 asks whether: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The taxpayer is prompted to answer “yes” or “no.” 2020 Form 1040.

New guidance from the IRS indicates that individual taxpayers who purchased virtual currency with real currency and had no other virtual currency transactions during the 2020 tax year are not required to answer “yes” to the virtual currency transaction question on their Form 1040. The IRS’s full list of FAQs related to virtual currency transactions, including new FAQ 5, can be found here.