In fact, the question about whether tax filers have a financial interest in any virtual currency is the first thing they’ll encounter after they enter their name and address. Last year, when taxpayers filed their 2019 returns, the question on cryptocurrencies was relegated to the accompanying Schedule 1, which is used for reporting certain adjustments or additional income such as unemployment benefits. But this year’s new prominent position on the 1040 itself is likely part of an attempt to crack down on cryptocurrency tax evaders, tax experts say. “By making the question prominent, it helps the IRS build cases against deliberate fraud involving virtual currencies,” Garrett Watson, a senior policy analyst at the Tax Foundation, a nonprofit tax policy research firm, wrote in an email. Just like last year, the question asks taxpayers: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” and then includes “yes” and “no” checkboxes. Taxpayers are required to check “yes” if they engaged in a transaction, but not if they only held a virtual currency in an account or wallet. Although it’s unclear how many taxpayers report virtual currency transactions, the “vast majority” of people in the U.S. who should be are not, according to Pat Larsen, co-CEO of ZenLedger, a cryptocurrency tax preparation software company founded in 2018. The clear-cut and upfront question on the 1040 form is likely to get more people to comply with reporting gains or losses. “Forgetting that crypto needs to be reported is very different than checking “no,” Larsen wrote in an email. “Tax professionals preparing tax filings will have to get an affirmative ‘yes/no’ from each of their clients.” “We continue to be very active in emerging areas such as virtual currency,” Rettig said, according to prepared remarks. “The IRS has been working to ensure taxpayers with virtual currency transactions understand the tax laws governing virtual currency and meet their tax obligations.” Trading apps like Robinhood and cryptocurrency exchanges like Coinbase have made sure “tens of millions of Americans hold crypto now,” Larsen wrote. “The IRS cannot ignore the capital gains and interest income from a $1.5T asset class.”
