The IRS really needs an exemption for crypto

Just a few questions.
Just a few questions.
Image: Reuters/Jonathan Ernst
We may earn a commission from links on this page.

The taxman cometh, and he asketh about virtual currency.

The US tax agency has released a new draft of its Schedule 1 form, used by taxpayers to report additional income and deductions. For 2019 tax filers, the Internal Revenue Service has posed a new question, prominently listed at the top of the document: ”At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

Talk about broad. Based on the IRS’s own definitions, the question covers practically every form of virtual currency, ranging from bitcoin to “V-bucks,” the in-game currency used by Fortnite players. Indeed, it seems almost anybody who’s sniffed digital money must answer in the affirmative. And well, that makes the question somewhat infuriating.

Instructions accompanying the form don’t help much either (see page 81). While it appears the query is intended to address unreported gains on cryptocurrency trading, it seemingly lumps everyone together—and with little regard for amounts transacted. Whether you bought $5 of bitcoin or $5 million, it appears you’re in the same boat. And answering the question falsely could have serious consequences. The IRS could not immediately offer comment on the legal specifics of the question.

In an October speech, Michael Desmond, chief counsel for the IRS, cited industry estimates that 8% of adults hold some form of virtual currency. But based on that figure and the approximately 150 million tax returns the IRS processes each year, he said, the agency doesn’t receive the expected 12 million tax returns reporting virtual currency transactions. “Nowhere near that,” he said. “This is a very high priority on the enforcement side for the IRS, because we think there’s a high degree of non-compliance.”

Unfortunately, the IRS’s most recent guidance (issued in October) has barely made a dent in the problem. A good starting point could be for the agency to limit its examination of cryptocurrency holders to those above a certain threshold. That way, the IRS could focus on the big fish.

Although US legislators have discussed creating a de minimis exemption for cryptocurrency transactions, allowing people to trade up to $600 in cryptocurrency without triggering tax consequences, those proposals haven’t gone very far. As Coin Center, a crypto lobbying group, has noted, a similar exemption exists for personal foreign currency transactions.

Until Congress finds a way to narrow the scope of cryptocurrency regulation, the tax agency is left with a mess. Anyhow, if you bought bitcoin, just make sure to check “yes.”

Bits & Pieces

  • Twitter is funding research into a decentralized version of its platform (The Verge)
  • Husbands are hiding money from their wives using cryptocurrency (WSJ)
  • Three men charged in $722 million cryptocurrency fraud (Bloomberg)
  • Crypto derivatives firm LedgerX puts founders on administrative leave after brush with CFTC (CoinDesk)
  • European Central Bank could expedite plans for public digital currency if cash use drops (Reuters)
  • Lazarus Group uses crypto exchange scam to spread Mac OS malware (Objective See)

Please send news, tips, and Fortnite skins to Today’s Private Key was written by Matthew De Silva and edited by Katie Palmer. First impressions last.