When the government thinks that taxpayers may not understand that a transaction is taxable, they’re going to look for a way to let taxpayers know that it may be taxable. This has been the case with the IRS and cryptocurrencies. The IRS released its first cryptocurrency guidelines in the mid-2010s and recently updated tax forms in 2019 to include a new cryptocurrency question.
In their 2014 guidelines, the government classified cryptocurrencies as personal property that are subject to property transaction rules like an investment. The government announced last fall that it would ask taxpayers on their 1040 form whether they received, sold, sent, exchanged or otherwise acquired any form of virtual currency.
Why the IRS cares
The IRS is concerned that taxpayers are not disclosing their cryptocurrency transactions. Thousands of taxpayers identified as likely misreporting cryptocurrency transactions in the past received letters from the IRS warning that cryptocurrency is a point of emphasis for the IRS in 2020.
To bridge the understanding gap between government and cryptocurrency groups, the IRS hosted those groups at a summit on March 3, 2020. Cryptocurrency leaders voiced their concerns over the taxation of cryptocurrency.
The implications for cryptocurrency users
Some cryptocurrency experts feel that the IRS is failing to understand that virtual currency transactions don’t fit into existing tax structures. These experts view the IRS’ recent changes as ambiguous and vague and could expose cryptocurrency users to audits and costly penalties. Taxpayers may want to reach out to a tax attorney in deciding how to answer the new 1040 question related to cryptocurrencies.