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It is tax season and the current Form 1040 asks taxpayers, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This is prominently placed on the first page of the tax return, right under the taxpayer’s address and above where dependents get listed. The question itself seems pretty straightforward for most people.

If there is any confusion, it would stem from how broad the term “financial interest” goes. If someone purchased shares of an exchange-traded product or invested in a private fund that owns Bitcoin, did that person acquire a financial interest in virtual currency? Maybe. If someone merely bought Bitcoin, is that an acquisition of a financial interest in virtual currency? One would think that the answer to this question likely is yes.

But the IRS seems to disagree. The IRS added a new “Question and Answer” to their list of FAQs discussing virtual currency transactions. This new Q&A says that if a taxpayer only bought virtual currency in 2020, then they should answer “no” to the question on the 1040.

LEGAL TOKENS

If you sold, staked, or received crypto as compensation, mined or engaged in any other transactions (other than merely buying crypto with dollars) in 2020, then you should answer yes to the question on the Form 1040. If you only bought crypto for dollars in 2020, then you should talk to your tax return preparer about how to best answer this question.

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Brett Cotler | Associate

Brett Cotler is an associate in Seward & Kissel’s Taxation Group and Blockchain and Cryptocurrency Group. Brett structures and advises clients on investments in digital assets, offerings of digital assets, and crypto-businesses. Brett specializes in U.S. federal and state tax and regulatory matters. He also:

  • Tokenized various assets;

  • Solves complex tax issues for companies, their principals, and their investors;

  • Structured an upstart token exchange; and

  • Advises on New York State Virtual Currency License applications.

“Under current U.S. law, any time a person uses cryptocurrencies for payments, it’s a taxable event, and a lot of casual PayPal users could end up being completely surprised by tax liabilities that could result from buying and selling bitcoin or other cryptocurrencies via PayPal.”
 
Brett’s thoughts on PayPal’s new crypto services, as published in PaymentsSource article “Why PayPal’s crypto plan may not be fully mainstream.”