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Virtual Currency: What You Need To Know Before You File Your 2020 Income Tax Return

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If you are one of the many individuals that mined, purchased or sold any cryptocurrency in 2020, you may have additional disclosure requirements on your 2020 income tax return.

2020 Virtual Currency Disclosure

The IRS is attempting to crack down on unreported income from virtual currency transactions, and has identified virtual currency as a compliance campaign topic in the IRS’s Large Business and International Division.

For 2020, the IRS moved the virtual currency question near the top of the front page of the individual income tax return, Form 1040. See image below.

On the surface, this appears to be an easy yes or no question. However, there may be repercussions if you answer it incorrectly.

Virtual Currency Transactions FAQ 5

On March 2, 2020, the IRS updated its Frequently Asked Questions (FAQs) on Virtual Currency Transactions. FAQ 5 indicates that if a taxpayer only purchased virtual currency in 2020 and had no other virtual currency transactions, the taxpayer should answer “No” to the virtual currency question on Form 1040.

Not so quick!

This FAQ is contradictory to the language in the question. Both the 2020 IRS Form 1040 and its instructions provide that a taxpayer who engaged in any transaction involving virtual currency must check the “Yes” box next to the question.

Think Twice Before Answering No

It is important to know that informal IRS guidance like the FAQs and the Internal Revenue Manual are non-authoritative. The IRS publishes them to assist taxpayers, but there are many court cases that demonstrate that taxpayers cannot use IRS informal guidance as a defense for a tax position taken.

If you only purchased virtual currency in 2020, while answering “No” to the question is technically correct based on the FAQ, it could lead to negative consequences down the road. In some situations it could lead to interest and penalties being assessed, and in some situations, criminal prosecution.

FinCEN Form 114 (FBAR) Implications

Under current Report of Foreign Bank and Financial Accounts (FBAR) regulations, foreign account holding just virtual currency is not a reportable account for FBAR filing purposes.

However, changes are forthcoming. FinCEN will be proposing amendments to the regulations to include virtual currency as a type of reportable account for FBAR purposes.

You can read more about FBAR filing requirements here. Reporting thresholds and requirements are still the same, but the due date has been moved up to April 15th.

If you are unable to file your 2020 FBAR by April 15, 2021, the report is automatically extended until October 15, 2021. Specific request for this extension is not required.

In Summary

Virtual currency disclosures are complicated and could lead to negative tax and legal implications. Please reach out to your tax advisor at Berntson Porter- we are happy to discuss the specifics of your situation.

Berntson Porter is here to help businesses navigate these challenging times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.