The Internal Revenue Service (IRS) just recently released the 2020 draft Form 1040. In your face right on page one, on a separately colored block: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” This question first appeared for the 2019 tax return, but it was not placed front and center; instead it was on the 2019 Form 1040, Schedule 1, “Additional Income and Adjustments to Income,” as a checkbox right at the top of the Schedule 1.
Everyone Must Answer!
With the draft Form 1040 for 2020 income tax returns, everyone will have to answer the question, not only those persons required to complete Schedule 1. For 2019 tax returns, many people need to file only Form 1040 or 1040-SR and none of the numbered schedules, Schedules 1 through 3. However, if the tax return is more complicated (for example, the taxpayer is claiming certain deductions or owes additional taxes), he or she will need to complete one or more of the numbered schedules. Schedule 1 is required if the taxpayer has additional income such as capital gains, unemployment compensation, prize or award money, gambling winnings; or has deductions, such as a student loan interest deduction, self-employment tax, or educator expenses.
Third-Party Reporting On the Way
As cryptocurrency has gained in popularity, so the IRS has upped its enforcement game with respect to crypto assets. It is clear that the IRS wants to know how much income is being generated from a taxpayer’s cryptocurrency investments. What better way than through third-party reporting?
Since the income realized from cryptocurrency investments is not employment-related, it seems more logical that the IRS may impose a 1099-type of reporting requirement for cryptocurrency. Currently, no specific regulations have been proposed by the IRS, but the past year of IRS heightened activity in the cryptocurrency world signaled that something was definitely on the way…. And, it is!
Latest Developments
There were a number of significant crypto developments that took place in July, all of them pointing to IRS regulatory mandates in the near future. Let’s see what has happened:
- On July 22, the Office of the Comptroller of the Currency (OCC) released a letter recognizing that banks may offer cryptocurrency custody services to their customers, including holding unique “cryptographic keys.” Generally speaking these keys are a string of characters that permit the account holder/user to access his or her cryptocurrency. The OCC letter explains that providing cryptocurrency custody services is in line with, and essentially is the modern equivalent of, the more traditional banking custody services, such as safe deposit boxes and vaults. Given this recent development it seems a logical next step that banks may soon be tasked with third party reporting to the IRS with respect to such cryptocurrency.
- Also in July, Mastercard announced it would expand its cryptocurrency program by bringing secure, compliant payment cards to the market by inviting cryptocurrency and crypto card partners to join Mastercard’s Accelerate program.. Wirex became the first cryptocurrency platform to be granted membership, allowing it to directly issue payment cards. Mastercard principal membership enables Wirex to issue payment cards directly to consumers, making it easier for people to purchase, hold and exchange multiple traditional and cryptocurrencies. Users can instantly convert their cryptocurrencies into traditional fiat currency, and that currency can be spent everywhere Mastercard is accepted globally. An added incentive for users is a reward program. Wirex Cryptoback rewards can be up to 1.5% back in Bitcoin for every purchase made in-store. History has shown us that a regulatory framework cannot be far behind such a new development.
- At around the same time in July as the above mentioned developments, attorneys at the Treasury Department and IRS explained during a webcast that third party reporting regulations addressing cryptocurrency transactions are now in the pipeline. The IRS had placed cryptocurrency reporting on a list of its regulatory priorities, but the timeline shifted, likely due to the urgencies of COVID-19.
- Based on information from public records, the IRS has contracted with Coinbase, a major US cryptocurrency exchange to use its proprietary blockchain tracing software (“Coinsbase Analytics”). The signing date was listed as July 14 on the Sam.gov database, which tracks contract offerings for US government agencies. The contract becomes effective on July 23 for a one-year term (with an apparent option to renew for a second year). The IRS is paying Coinbase $124,950.00 for that first year of use. It has also been reported that IRS negotiated a contract with another blockchain analytics firm based in the United Kingdom.
With all this activity, some significant regulatory and enforcement action for crypto is on the way! Keep up to date and watch this space. For those wishing more information on US taxes and crypto, visit my US tax blog that has a category devoted to the topic.
Posted September 10, 2020
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