Long-time holders can answer “no” if they held cryptocurrency without trading it.
The U.S. Internal Revenue Service (IRS) has updated the criteria for reporting cryptocurrency purchases in this yearâ€™s tax report. This brings more clarity for U.S. taxpayers.
Clarity on the Crypto Question
Beginning in 2020â€™s tax season,Â Form 1040Â of the U.S. Individual Income Tax Return will feature a question on cryptocurrency investments, to which investors must answer â€œyesâ€ or â€œno.â€
The question reads: â€œAt any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?â€ In the latest version of the draft forms, there is new criteria for checking â€œyesâ€ on that question.
As per the newly-updated instructions, U.S. taxpayers in 2020 must report â€œyesâ€ to the question on the first page of Form 1040 if they engaged in any of the following activities last year:
- Purchase of cryptocurrencies (updated)
- Sale of cryptocurrencies
- Exchange of cryptocurrencies for other cryptocurrencies, assets, goods, services, etc.
- Receipt of cryptocurrencies via airdrops or hard forks.
If a taxpayer does not meet any criteria, they can answer â€œno.â€
Previous confusion stemmed from the fact that the instructions excluded â€œpurchase of cryptocurrencyâ€ under the reporting criteria, which demands a â€œyesâ€ answer under the new rules.
Other Important Considerations
In addition to providing more clarity on whether one should answer â€œyesâ€ to the crypto reporting question, the IRS reiterated a few other points that taxpayers should consider.
Merely holding cryptocurrency in a wallet account or transferring it between wallets or accounts one owns or controls does not require taxpayers to answer â€œyes.â€ This means that long time holders ofÂ Bitcoin,Â Ethereum, and other altcoins can answer â€œnoâ€ if they did not sell or exchange cryptocurrency last year.
Additionally, the question on the front page of Form 1040 is only for reporting purposes. The final taxes on cryptocurrency gains or losses are calculated separately on Schedule D on Form 1040.
â€œIf you disposed of any virtual currency that was held as a capital asset through sale, exchange, or transfer, use Form 8949 to figure your capital gain or loss and report it on Schedule D on Form 1040,â€ the IRS explained in the draft instructions.
The newly-updated tax forms should make tax reporting more straightforward for crypto investors this year.