Clarity Around Cryptocurrency Question on Form 1040
If you own any cryptocurrency, you are probably familiar with the question that now appears on the first page of your individual tax return:
“At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
This question is the source of frustration for many taxpayers, as it is not made clear which transactions meet the requirement. In order to help taxpayers in 2022, the American Institute of CPAs (AICPA) issued comments and recommendations to the IRS.
Clarify the Definition of Virtual Currency
As of now, the IRS defines virtual currency as:
A digital representation of value that functions as a unit of account, store of value OR a medium of exchange
However, the IRS contradicts itself and in its Virtual Currency FAQ, defining it as:
A digital representation of value that functions as a unit of account, store of value AND a medium of exchange
There must be clarity around the definition as different types of assets (such as NFTs, loyalty points, or gaming currency tokens) would qualify as virtual currency under one definition, but not the other.
Modify the Virtual Currency Question for Simplicity and Clarity
On July 27, 2022, the IRS released a draft of the 2022 Form 1040, which included a proposed version of the question on virtual currency:
“At any time during 2022, did you: (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)? (See instructions.)”
The AICPA believes, and I agree, that the proposed language needs to be simplified and clarified to require a “yes” for taxable events only, as that seems to be the objective of the question. The language proposed by the AICPA is below:
“At any time during 2022, did you have a taxable event involving virtual currency? See instructions. __ Yes __ No”
The proposed language makes it clear which transactions meet the requirement and will save taxpayers, and tax professionals, from unnecessary research or amended returns in the future.
The AICPA proposed three additional changes, but the two I highlighted would provide the greatest benefit to taxpayers. Based on the research and conversations with other tax professionals, I have advised taxpayers to answer “yes” to this question in the past if they have had a taxable event involving virtual currency. However, taxpayers may have interpreted this question differently and answered based on a false set of assumptions.
There are numerous topics that need to be addressed by the IRS regarding cryptocurrency. Updating the language around this question, as well as providing clear definitions, would be a start.