You Might Not Have to Tell the IRS About Your Bitcoin

The Internal Revenue Service has clarified that US taxpayers do not have to declare financial interests in Bitcoin and other cryptocurrencies if they only bought crypto using US dollars, it said in an FAQ page.

As picked up by crypto tax software company CoinTracker, the IRS said that taxpayers do not have to answer “yes” to the new question on the front page of the 2020 tax mandatory form: “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” 

The IRS said that “if your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

The IRS clarified that virtual currencies encompass cryptocurrencies and a “real currency” is a fiat currency, for instance the US dollar. So, if you only used US dollars to buy Bitcoin, you won’t have to disclose your crypto interests to the IRS.

However, if you used US dollars to buy a US dollar stablecoin—a cryptocurrency representing a US dollar—and then used the stablecoin to buy Bitcoin, you would have to check “yes” to the 1040 crypto question, since you’re buying a cryptocurrency with a cryptocurrency. 

Shehan Chandrasekera, head of tax strategy at CoinTracker, told Decrypt that the clarification will reduce the number of people that unnecessarily tick “yes” to the question.

And he would have forgiven taxpayers for overreporting. “It wasn't super obvious to anybody,” he said. “And a lot of people were confused, because the IRS was not very clear in terms of giving instructions on how to answer this question.”

The question appeared on the mandatory tax form for the first time in the tax form’s history—and on the front page, no less, making it mandatory. 

The clarification could be good news for privacy advocates, he said. A taxpayer can opt out of contributing to the IRS’s growing database of US crypto HODLers. 

“They're explicitly saying that if you're just purchasing crypto using US dollars, we don't have to know about you,” said Chandrasekera. “They're creating a huge blind spot,” he said, since lots of people only buy Bitcoin on Coinbase for USD and HODL for the long haul. 

However, since crypto companies must keep records of US dollar transactions to prevent money laundering, only buying crypto with US dollars isn’t ideal for going off the grid.

It should also be noted that this is not a way out of paying capital gains taxes on cryptocurrencies; if a cryptocurrency is sold for a “real” currency, then taxpayers must recognize any capital gain or loss on the sale, wrote the IRS in another response to its FAQ. And if a HODLer does that, they’d have to check “yes” on the tax form anyway.