DRAFT 2020 FORM 1040 INSTRUCTIONS REVISE VIRTUAL CURRENCY TRANSACTION INFORMATION

05 November 2020

Draft 1040 and 1040-SR Instructions (rev. 10/22/2020)

Frequently Asked Questions on Virtual Currency Transactions (rev. 10/8/2020)

The IRS has added to the 2020 draft instructions for Form 1040 and 1040-SR, regarding virtual currency transactions, 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 from one wallet or account the taxpayer owns or controls to another that the taxpayer owns or controls.

Background. In 2019, the IRS added the question, “At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” to the Form 1040.

The 2019 instructions to Form 1040 noted that, “A transaction involving virtual currency includes:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a 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.”

Instructions revised. The 2020 draft instructions to Form 1040 keep the 2019 wording, but add the following: “A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control.”

Note that a wallet or account is an online ledger managed through a cryptocurrency exchange. (Rev Proc 2019-24, 2019-44 IRB)
These instructions reflect the answer given in FAQ 35 of the IRS’s Frequently Asked Questions on Virtual Currency Transactions.