The U.S. Internal Revenue Service (IRS) has released a draft 1040 form for 2020, which immediately asks about cryptocurrency.
The crypto question comes immediately after the section where the taxpayer enters their name and address.
1040 crypto compliance
The question reads, “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
The IRS has beefed up their interest in Bitcoin and other virtual currencies over the last few years. After a lengthy debate on how to handle taxation for cryptocurrencies, the tax collection agency decided to classify crypto as property.
The result of this classification means that a person has to pay taxes if they realize a profit when they convert the cryptocurrency. This had required those holding crypto to keep accurate records on when they bought their crypto and how much they paid for it at the time.
Of course, this also means that a person could record a loss when selling virtual currencies if they sell it for less than what they paid for it. Such gains or losses will be recorded on the Schedule D part of the 1040 form.
Several companies are now specializing in tracking cryptocurrency transactions regarding tax purposes.
IRS sends out soft notice letters again
Last year, the IRS sent out three different letters to over 100,000 taxpayers the agency believes may have bought or sold virtual currencies. The letters from the tax agency ranged from a statement that the taxpayer complied with a statement that it was believed the taxpayer had not reported income from the sale of cryptocurrencies.
It appears that the IRS has sent out such notices again. The Taxpayer Advocate Service, an internal watchdog, says that such soft notices undermine the legal protections of taxpayers.
The watchdog states, “However, the IRS’s soft letters have been including language aimed at compliant taxpayers that requires them to produce documents and a detailed supporting statement signed under penalties of perjury.”
The Taxpayer Advocate Service adds, “The soft letters, which may cover more than one tax period, request information not included on a return and possibly cover years outside the statute of limitations for assessment. The information requested is akin to an IRS examination but without providing the taxpayer rights and protections afforded by an examination.”
Overall, when the 2020 1040 form becomes official, it’s a wise move to be accurate when filling it out if you realized a profit from investing in Bitcoin and other cryptocurrencies.