The U.S. Internal Revenue Service (IRS) has released a second draft of Form 1040 and instructions where it has fine tuned and clarified the tax reporting requirements for cryptocurrency transactions and investments. This is applicable for U.S. individuals to file their income tax return for 2020 tax season.
In the first draft released in August last year, after asking for personal details, the draft form asks, “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Yes or No.
The second draft explains the question in the first draft in the instructions and says, “If, in 2020, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.”
According to the instructions, a transaction involving virtual currency includes the receipt and transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork.
It also includes an exchange of virtual currency for goods or services, a purchase or sale of virtual currency, an exchange of virtual currency for other property, including for another virtual currency, and an acquisition or disposition of a financial interest in virtual currency.
However, a transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control.
Meanwhile, virtual currencies held as a capital asset, which was disposed through a sale, exchange or transfer, should be reported on Schedule D (Form 1040) after calculating the capital gain or loss using Form 8949.
Further, any income from virtual currency received as compensation for services or disposed virtual currency that is held for sale to customers in a trade or business must be reported as you would report other income of the same type such as W-2 wages on Form 1040 or 1040-SR, line 1, and inventory or services from Schedule C on Schedule 1.
This year the IRS intends to ask every American tax filer about their cryptocurrency transactions and investments in 2020 filing. This is the latest move by the tax regulator to show its seriousness on taxing cryptocurrency transactions and investments.
The IRS treats virtual currency as a commodity or property, and not as real currency, for federal tax purposes. Therefore, virtual currencies are also subject to capital gains laws.
Source: Read Full Article