The United States taxation agency has clarified who must answer ‘yes’ to an issue over crypto-currency activity included within the draft 1040 federal tax form.
As reported earlier in September, the IRS [Internal Revenue Service] revealed it might reposition an issue on the 1040 form for 2020 which will require returnees to point if they “acquired any financial interest in any virtual currency” over the tax year.
Within an official recently published set of draft instructions, the IRS now explains that taxpayers would wish to answer within the affirmative if they sold any cryptocurrency, exchanged cryptocurrency for goods or services, or exchanged cryptocurrency for the property including other cryptocurrency assets.
It also sets out that respondents must answer “yes” if they received any crypto-currency for free of charge, including via airdrops or hard forks.
Airdrops are free distributions of cryptocurrency to users or potential users, often within a bid to begin the adoption of a new coin.
Hard forks, updates to a blockchain’s code that need users to update to the remake, sometimes arise within the division of a sequence into two competing but similar networks, each with its own cryptocurrency.
When such a fork occurs, holders of the first coins can also automatically receive a similar number of assets on the new chain. For instance, holders of 10 bitcoin automatically owned 10 bitcoin cash after a hard-fork earlier in 2017.
The IRS draft guidance also makes clear taxpayers needn’t check yes if they merely held cryptocurrency in 2020, or moved it from one wallet to a different owned by them.
The draft is probably going to face unless there are “unexpected issues” or new legislation requiring changes, the IRS said within the document.
With the IRS’ paucity of guidelines on the way to pay cryptocurrency taxes much criticized in recent years, the clarification may come as some relief to 1040 form returnees. The tax agency has been somewhat heavy-handed sometimes, ignoring its own watchdog’s advice when sending out “soft” warning letters broadly inquiring about unpaid or incorrectly filed cryptocurrency taxes.