November 2019 Foodman CPAs & Advisors website

During the month of October 2019, IRS issued Revenue Ruling 2019-24FAQ’s on Virtual Currency Transactions and a DRAFT Form of Schedule 1,  which, for the first time presents the question:  “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency”? 

The Compliance Checkbox appears at the top of Schedule 1

Schedule 1 is used to report Taxpayer’s additional income and adjustments to income.  If a Taxpayer’s answer to the question is no, and does not have to file Schedule 1 for any other purpose, then a Taxpayers does not need to file Schedule 1.  However, if a Taxpayer usually does not file Schedule 1, he or she might not be aware that there is a Virtual Currency question on Schedule 1.

IRS also issued Draft Instructions for Schedule 1

The Draft Instructions state that a transaction involving virtual currency includes:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a “hard fork”. IRS states: “A hard fork occurs when a cryptocurrency undergoes a protocol change resulting in a permanent diversion from the legacy distributed ledger. This may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger”;
• An exchange of virtual currency for goods or services;
• A sale of virtual currency; and
• An exchange of virtual currency for other property, including for another virtual currency.

Other Virtual Currency Instructions on Schedule 1

 If a Taxpayer disposed of any virtual currency that was held as a capital asset, Form 8949 is used to figure a Taxpayer’s capital gain or loss and report it on Schedule D (Form 1040 or 1040-SR).

 If a Taxpayer received any virtual currency as compensation for services or disposed of any virtual currency that was held for sale to customers in a trade or business, a Taxpayer must report the income as a Taxpayer would report other income of the same type (i.e. W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1).

 If, in 2019, a Taxpayer did not engage in any transaction involving virtual currency, and a Taxpayers doesn’t otherwise have to file Schedule 1, a Taxpayer has nothing further to do.

Failing to check the Box

The location of the checkbox on Schedule 1 could be an issue.  Taxpayers might not see it; Tax Preparers might overlook it, or a Tax Return could be paper filed.  Failing to check the Box (if the answer is yes) is a “compliance” issue for Taxpayers. 

Taxpayers sign Tax Returns under penalties of perjury

“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge”.

Taxpayers that accidentally miss the checkbox on Schedule 1 may face fines and penalties. 

Don’t be a victim of your own making

The IRS is on to Virtual Currency in the same manner as it is with Offshore Accounts.  Virtual currency transactions are taxable by law just like transactions in any other property. Taxpayers transacting in virtual currency may have to report those transactions on their tax returns.  Consult your specialized Tax Advisor.