Think Well Before You Answer IRS Crypto Tax Return Question

This year, when you file your taxes, the Internal Revenue Service (IRS) will ask you a simple question: “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It looks quite simple, you just have to answer yes or no. What can be wrong with this question? It does not expect you to go into details and provide figures, though, if you sold some it should be seen elsewhere on your tax return. In the end, the IRS regards crypto as property, which means that any sale assumes gain or loss (therefore, taxes).

You may think that IRS is just observing who is using crypto. Not necessarily, and a simple yes or no question may have serious implications. Considering the IRS’s track record with offshore bank accounts, it could even lead to heavy penalties or even jail.

The controversy behind IRS’s crypto tax return question

The new IRS question sits at the top of Schedule 1 of your 2019 Form 1040. It asks you directly whether you received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during the year. Attentive people may note that this reminds them about the foreign bank account question which appears in Schedule B.

This way, if you check the wrong box, you will commit a perjury. If a taxpayer answers “no”, but the IRS discovers that they were conducting crypto transactions during 2019, the fact of answering no to the new question (under penalties of perjury) could be used against them. So, if you had something to do with cryptocurrencies, you choose yes, right?

What if you just have a sort of “signature authority” over crypto owned by your parents or relatives who are not very good with computers? You just help them manage their holdings. If you sell a parent’s crypto on their behalf, at their request and/or for their benefit, should you answer “yes” or “no” to the question? Either way, should you add explanations to the return, detailing what you actually do with virtual currency?

It is quite challenging to answer these questions properly. What is clear is that if you answer “no” if the truth is “yes”, it is a serious blunder. The consequences won’t be that bad if you skip the question completely, but is not a good idea either if, in fact, you have to answer “yes.” If the truth is “yes”, say so, and disclose and report your income, gains, losses, etc. Maybe, this is the reason behind the question: to be a strong reminder.

If you understood that you forgot to report your crypto gains in past years, consider amending to tackle the problem. Don’t wait for the IRS to find you, even if you were not one of those who got one of 10,000 IRS crypto warning letters last year. Just keep in mind, that the IRS is very interested in crypto and attempts to get to those who don’t report.

Moreover, it seems that the IRS is sure that millions of transactions may go unreported. Taxpayers may hope that they won’t be caught, but the risks accelerate, and the best way to avoid troubles it to disclose and report as thoroughly as possible. IRS Commissioner Chuck Rettig has even moved to increase criminal investigations, too. Last year’s IRS letters to 10,000 crypto taxpayers were just the beginning.

Takeaways

The new crypto tax question on Form 1099 should get you thinking. After all, the Department of Justice’s Tax Division stated that the mere failure to check a box related to foreign account reporting is per se willfulness. Willful failures mean heavier penalties and an increased threat of criminal investigation. The IRS’s Criminal Investigation Division is even meeting with tax authorities from other countries to share data and enforcement strategies to disclose possible crypto tax evasion.