In brief

  • The IRS has a new draft tax form.
  • A question on that form makes it clear the agency wants to know about American taxpayers' cryptocurrency activity.
  • Tax filers must answer the question.

The US’s tax office, the Internal Revenue Service, has put cryptocurrency front and center in a draft of its new tax return form. This means that everyone filling it out must state whether or not they have acquired or traded cryptocurrencies, such as Bitcoin. 

Here’s the question on the new form: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” 

The IRS asked taxpayers the same thing last year, but the question appeared on a Schedule 1 form, which taxpayers had to specifically request. This time, the question appears on the first page of the IRS’s mandatory tax form. 

So, what does this mean for US taxpayers? 

As Chandan Lodha, co-founder of crypto tax software company CoinTracker, told Decrypt: “The implication for users is pretty clear—if you want to stay out of the IRS' crosshairs, make sure you are staying compliant with the cryptocurrency tax rules.”

With the new form, “answering this question becomes compulsory,” Shehan Chandrasekera, CoinTracker’s head of tax strategy, told Decrypt. “You can not falsely say ‘no’ to this question if you trade crypto because you are signing the tax return under penalty of perjury.”

Failing to fill in the form correctly is “really setting an intent that you didn't want to comply,” Roger Brown, Head of Tax and Regulatory Affairs at Lukka, told Decrypt. Then, he said, “Penalties around potential non-compliance get scaled up, from a monetary penalty to maybe even criminal investigators getting involved.” 

Brown’s point is that it’s difficult to plead ignorance, which may have flown last year. “Now,” he said, “because it’s on page one, it’s hard to say, ‘Oh, I didn’t know.’” 

It’s possible that the IRS already knows that you hold cryptocurrency. This month, the IRS sent out another batch of letters warning taxpayers suspected of owning cryptocurrency to file their taxes correctly and cough up taxes for previous years. 

It’s likely that the IRS worked this out by subpoenaing cryptocurrency exchanges, such as Coinbase and Bitstamp, for data about their US users, and by using blockchain analytics tools produced by Chainalysis, Coinbase, and Palantir.

So, you have to answer the question. But “answering ‘yes’ does not mean you have to pay taxes,” said Chandrasekera. “In some cases, you can write off crypto losses to reduce your taxes. Or if you receive a gift, you would check ‘yes’ but you won't have anything to report on your taxes.”

CPA Ani Galyan, Esq. of Galyan Law, a member of the California Society of CPAs, told Decrypt, “Taxpayers who have any transactions with virtual currency should consult with a tax advisor before marking ‘no’ on this question because marking ‘no’ may result in a false statement to the IRS, a crime [in] itself.” 

Filing crypto taxes, however, is quite the affair. It’s necessary to calculate the capital gains tax of each cryptocurrency transaction.  “When you deal with multiple exchanges, wallets and DeFi platforms, calculating your capital gains and losses manually is virtually impossible,” said Chandrasekera. Crypto tax software, like those produced by LukkaTax, CoinTracker, and Recap, can be helpful here.

The form is still but a draft, and there’s a slight possibility that the question may be moved or erased. Brown, who used to work at the IRS, said the agency will likely print the forms in the next two months. But there’s a reason the IRS put it there, he said: “I’d be surprised if it didn’t remain.”