Cryptocurrency

IRS clarifies the reporting necessities for crypto bought with fiat

irs-clarifies-the-reporting-necessities-for-crypto-bought-with-fiat

The United States Internal Revenue Service (IRS) has updated its FAQ section on cryptocurrency to clarify that investors who have only purchased crypto assets with fiat currency do not need to report their transactions under the “virtual currency” question.

The first page of the US Citizen Individual Income Tax Return Form or Form 1040 asks if the respondent received, sold, sent, exchanged, or otherwise acquired “financial interests in a virtual currency” in 2020.

The wording of the form therefore suggests that people who have acquired crypto assets in any way should answer yes to the question, regardless of whether the virtual currency was purchased using US dollars, Kenyan shillings, or peanuts.

However, Question 5 of the IRS’s updated cryptocurrency FAQ information asks if a person who “bought virtual currency with real currency and did no other virtual transactions during the year” needs to report this activity on Form 1040. The answer now says:

“If your only virtual currency transactions in 2020 were virtual currency purchases with real currency, you don’t need to answer yes to Form 1040.”

The new FAQ section suggests that crypto investors do not need to report these transactions provided they have only bought cryptocurrency for US dollars and have not made crypto-to-crypto deals or sold their digital assets for fiat. Conversely, the transactions must be reported if they bought crypto with other crypto assets or sold one of their cryptocurrencies in 2020.

While the IRS has been trying to give crypto investors more clarity on their reporting requirements in recent years, the pace of innovation in virtual currency means regulators often have to catch up.

A Law Library of Congress report commissioned by Republican Representative Tom Emmer found last month that only five countries have established tax policies for cryptocurrency manufacturers. Emmer urged the IRS to provide clear guidance to leaders, stressing that tax requirements must be “applied wisely” so as not to deter innovation.

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Melinda Martin