The IRS has revised its guidance on what constitutes virtual currency on its webpage, but there was a bit of confusion that was generated with comments from IRS Chief Counsel Michael Desmond on the day following the change.  Now the IRS has issued a clarification that may help to resolve this matter, at least in most cases.

This year the IRS added a question to Schedule 1, Form 1040 and 1040-SR, that asks taxpayers for the following information regarding virtual currency transactions:

At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

The IRS has a web page titled “Virtual Currencies” that contains information on virtual currencies, beginning with a section titled “What is a Virtual Currency?” which seemed a good place to look to see exactly what the agency wanted taxpayers to inform them about.[1]  Advisers and taxpayers turned to that page to figure out how to answer the question on Schedule 1.

Until February 12, that page had the following as part of the description of virtual currencies:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency. (Emphasis added)[2]

The last two items listed surprised many readers, especially the final one.  For those who aren’t aware, V-bucks are the in game currency used in the popular online game Fortnite.  The reference led to questions regarding whether the IRS really wanted parents who had purchased V-bucks for their children who play Fortnite to check that box yes.

On February 12, Bloomberg Tax reporter Ally Versprille reported that after she began asking the IRS about the issue, the web site language was changed, although initially the IRS did not otherwise respond to her questions.[3]  The site now has the following language in place of the portion quoted above:

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency.[4]

The following day, IRS Chief Counsel Michael Desmond briefly discussed the issue with reporters prior to a session.  Ms. Versprille provided details of Mr. Desmond’s comments in another Twitter thread. She indicated he told reporters “that ‘I think it needed to be corrected’ when asked why the gaming currency language was removed from the agency webpage on virtual currency.” [5]

When pressed whether this meant that such items did not require taxpayers to check the box on Schedule 1, Mr. Desmond responded:

I asked: “So if people have gaming currency they don’t need to check ‘yes’ on the 1040?”

He said: “I am not even looking into that...I’m not saying one way or another. I think I’d be getting ahead of myself if I said anything. Read the website. We posted a correction yesterday.”[6]

So the answer now seemed to be a definite maybe—not the most satisfying of answers regarding dealing with that question.

Finally, on Valentine’s day, the IRS issued a release to the press regarding this situation that may finally clarify the issue:

The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return. (Emphasis added)[7]

So, now that the dust has settled, it appears the IRS does not want the box checked if a taxpayer merely acquires V-bucks or similar currencies in the game and uses them in the game.  Similarly, a taxpayer buying such in-game currencies solely for use in the game also appears to be in the clear.

As far as taxable income goes, it should be clear that someone who buys in-game currencies to hold and then sell for cash later expecting them to appreciate, will have (and always would have had) reportable income if they are correct and the currency went up in value.  But parents no longer have to be concerned that they and/or their children will need to check the box on Schedule 1 simply because they are playing Fortnite.

[1] IRS Virtual Currency webpage, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies, February 12, 2020 revision, retrieved February 14, 2020

[2] IRS Virtual Currencies webpage, version archived on January 14, 2020, http://web.archive.org/web/20200114132858/https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies, retrieved February 14, 2020

[3] Ally Versprille, https://twitter.com/allyversprille/status/1227734823168618499, February 12, 2020

[4] IRS Virtual Currencies webpage, February 12, 2020 revision, https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies, retrieved February 14, 2020

[5] Ally Versprille, https://twitter.com/allyversprille/status/1228009576626302976, February 13, 2020

[6] Ally Versprille, https://twitter.com/allyversprille/status/1228014842453352449. February 13, 2020

[7] Ally Versprille, https://twitter.com/allyversprille/status/1228383065753432064, February 14, 2020