This post was originally published on Yahoo Finance on January 7, 2020.
The IRS wants to know whether you traded cryptocurrency in 2019, a question it had never overtly asked taxpayers in the past.
In a new report on Monday covering fiscal 2019, the agency listed cryptocurrency and the gig economy as two key “emerging compliance areas that require attention” by the IRS. For crypto, that attention is taking the form of a new question on the 2019 Form 1040 (for additional income).
The question is at the very top of the form, and reads: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”
watch out crypto tax evaders - the IRS is coming for you with a mean new checkbox pic.twitter.com/Fi9qrAy5bv
— 𝘽𝙄𝙇𝙇 𝙎𝙒𝙀𝙀𝙏 (@billsweet) January 3, 2020
The IRS already had official guidance on cryptocurrency, first posted back in 2014: the agency classifies cryptocurrency as property, rather than as currency, and thus taxpayers would treat crypto selling as capital gains (or losses) and disclose it on Form 8949—if you choose.
In the past, the common attitude in crypto land toward disclosing crypto gains on your taxes was that there was little to gain from doing so—you’d risk an audit if you did, and would likely fly under the radar if you didn’t.
Now the IRS is getting more serious.
Cryptocurrency believers may take the change as a warning shot—a sign that the IRS will more closely monitor cryptocurrency trading gains, and will go after those who do not disclose.
“This new question is really unprecedented, in that 170 million taxpayers are now potentially going to have to answer that question,” says Austin Woodward, a CPA and the CEO of cryptocurrency tax software TaxBit. “If you lie, now the IRS can prove intent, whereas before, pleading ignorance, you could kind of get away with it.”
Crypto tax reporting is already a nuisance, but the IRS auditing and fraud nightmare is about to begin. 2020 will see at least one tax evasion case of a high-profile early adopter. The IRS will start with the lowest-hanging fruit (true fraud) and work up to more complex cases.
— Elaine Ramirez | 일레인 기자 (@elainegija) January 6, 2020
The phrasing of the question is also creating some confusion, since it mentions not just selling and receiving crypto, but also sending or exchanging it. That prompted some crypto folks on Twitter to wonder whether simply sending bitcoin from one digital wallet to another requires disclosure on your taxes. That answer is no. In an extensive FAQ about virtual currency transactions on its website, the IRS specifies, “If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event.”
The IRS, in its report this week, also disclosed that in 2019 it sent “educational letters” to more than 10,000 taxpayers “who may have failed to properly report virtual currency transactions.” And the IRS cautions: “Virtual currency, also called crypto currency, will remain an important focal point for the IRS in 2020.”
Read more in our Taxes and Cryptocurrency sections