Draft instructions for Form 1040 include a few new details about how taxpayers should answer the question about virtual currency transactions.
Virtual Currency Transaction Question Moves from Schedule 1 to Page 1 of Form 1040
For 2019, the very first item on Schedule 1 (Form 1040), Additional Income and Adjustments to Income, was a yes-or-no question that asked:
At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?
According to the Schedule 1 instructions, all taxpayers were expected to answer this question, even if they were not otherwise required to file a Schedule 1. However, it seems likely that at least a few taxpayers who had virtual currency transactions missed the virtual currency question if they had no other Schedule 1 items.
Virtual Currency Transaction Question Moves to Form 1040 for 2020
The draft Form 1040 for 2020 moves the virtual currency transaction question from Schedule 1 to page 1 of Form 1040 itself, right under the address information. Thus, all taxpayers, not just those with Schedule 1 items, will be expected to answer “yes” or “no” as to whether they engaged in virtual currency transactions during 2020.
Draft Instructions for 2020 Form 1040 Address Virtual Currency Wallets
The draft instructions for the 2020 version of Form 1040 repeat the 2019 Schedule 1 definition a transaction involving virtual currency is:
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
- An exchange of virtual currency for goods or services
- A sale of virtual currency; and
- An exchange of virtual currency for other property, including for another virtual currency.
Virtual Currency Wallets Transfers Are Not Transactions
However, the 2020 draft instructions also clarify that a transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency between wallets or accounts that the taxpayer owns or controls.
Reporting 2020 Virtual Currency Transactions
The 2020 draft instructions and the 2019 Schedule 1 instructions also agree about how taxpayers who engaged in virtual currency transactions should report the results.
A taxpayer who held the virtual currency as a capital asset uses Form 8949, Sales and Other Dispositions of Capital Assets, to calculate capital gain or loss on a disposition of the currency. The gain or deductible capital loss is included with other gains or losses on Schedule D, Capital Gains and Losses.
A taxpayer who received virtual currency as compensation for services, or disposed of virtual currency held for sale in the ordinary course of a trade or business reports the income like other income of the same type. For example, virtual currency received as compensation for services may be reported as W-2 wages on Form 1040, or as business income on Schedule C, Profit or Loss from Business, that is carried over to Schedule 1 income. Virtual currency received for the sale of inventory is also reported on Schedule C.
By Kelley Wolf, J.D., LL.M.