The Internal Revenue Service (IRS) has updated its instructions for disclosing cryptocurrency activities. The update clarifies who must answer “yes” to the IRS encryption question and when to choose “no” as the answer.

The IRS releases new encrypted tax declaration instructions

The Internal Revenue Service (IRS) issued an update to Form 1040 on December 31. It includes additional information on how to answer cryptocurrency questions on the main tax form that individuals use to file U.S. tax returns.

The first question on Form 1040 is about cryptocurrency. It reads: “Any time in 2020, do you receive, sell, send, exchange or otherwise obtain any financial rights in any virtual currency?” Taxpayers only need to answer “yes” or “no” to this question .

According to crypto-tax software company Cryptotrader Tax, the U.S. Internal Revenue Service now requires taxpayers who purchase cryptocurrency in 2020 to answer “yes” to the encryption question on Form 1040, not just that they sold, traded or exchanged cryptocurrency But contrary to the previous instructions. Company detailed introduction:

This language did not exist in the previous teaching guide published in October. The Internal Revenue Service will now know about everyone who buys cryptocurrency in 2020, because all taxpayers will have to answer this question and be punished for perjury.

All in all, if taxpayers buy or receive (including through airdrops or forks) cryptocurrency, they must answer “yes” to the IRS cryptocurrency question in 2020. If they sell one cryptocurrency in fiat currency or exchange one cryptocurrency for another, they must also answer “yes.” In addition, if they use cryptocurrency to buy goods or services, they need to answer “yes”.

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Form 1040 for the 2020 tax year, showing cryptocurrency issues.Source: US Internal Revenue Service

The new directive also clarifies when taxpayers do not need to answer “yes” to encryption questions. Description of the IRS:

Transactions involving virtual currency do not include holding virtual currency in a wallet or account, nor does it include transferring virtual currency from one wallet or account that you own or control to another wallet or account that you own or control.

“For long-term holders who are not sure whether they need to choose yes or no, this is a valuable clarification,” Cryptotrader Tax commented.

The IRS also explained that if taxpayers dispose of any cryptocurrency held as capital assets through sale, exchange or transfer, they must use Form 8949 to calculate their capital gains and losses and report them in Schedule D of Form 1040.

What do you think of the IRS tax filing requirements? Let us know in the comments section below.

Picture Credits: Shutterstock, Pixabay, Wiki Commons, IRS

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