The final 1040 instructions seem to suggest that an “acquisition of a financial interest in a virtual currency” may not be an “acquisition of an interest in a virtual currency” in some cases for purposes of answering the first question to be answered on Form 1040 after the taxpayer’s identifying information and address.  But the instructions don’t provide any information on how such non-acquisition acquisitions are to be identified.

In the final version of the Form 1040 Instructions[1] the IRS modified the list of reportable virtual currency transactions, eliminating certain items found in the December 31, 2020 draft version, but the question on the Form 1040 remained unchanged—and still suggests, at least to some, that the deleted items would still be reportable.

Just below the address block on the 2020 Form 1040 is the following question related to virtual currency:

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?[2]

In a set of draft Form 1040 instructions released on December 31 the IRS noted that a transaction involving virtual currency includes, but is not limited to, certain examples.  Two of the listed examples were:

• A purchase or sale of virtual currency and

• An acquisition or disposition of a financial interest in a virtual currency.[3]

Thus, the instructions provided, in those cases the question would be answered with a yes.

A week later the final version of the instructions was released and the references to a purchase or acquisition in the example transactions were omitted.  However, the question on the front page of the Form 1040 continued to ask if the taxpayer had otherwise acquired “any financial interest in any virtual currency.”

Since purchasing a currency seems to be an acquisition of a financial interest in the currency and, even more clearly, an acquisition of a financial interest in a virtual currency would be an acquisition of a financial interest in a virtual currency, it wasn’t clear what, if anything. was changing due to this revision of the instructions.

But the IRS seems to be taking the position that they did remove items from the types of transactions that would require answering “yes” to the question.

In an article published in the February 8, 2021 issue of Tax Notes Today Federal, an IRS spokesperson is quoted as saying that “[i]f the only activity someone has is a purchase/acquire and hold, then they don’t have to check the box.”[4]

However, as Zhanna A. Ziering of Caplin & Drysdale Chtd. was quoted as observing in the article, the answer appears to be at odds with the plain language of the question on the Form 1040.[5]

Likely the IRS is trying to figure out how to ask for transactions that would have a tax impact, ignoring those that don’t, but at this point the question remains broad in scope—and nowhere does the IRS explicitly state that only a taxable transaction should lead to a yes answer to that question.

[1] 1040 and 1040-SR Instructions, January 6, 2021, https://www.irs.gov/pub/irs-pdf/i1040gi.pdf (retrieved February 6, 2021)

[2] 2020 Form 1040, p. 1

[3] Draft 1040 and 1040-SR Instructions, December 31, 2020, p. 16

[4] Kristen A. Parillo, “Final Crypto Instructions May Send Mixed Signals,” Tax Notes Today Federal, February 8, 2021, 2021 TNTF 25-5, https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/final-crypto-instructions-may-send-mixed-signals/2021/02/08/2r46r (retrieved February 6, 2021, subscription required)

[5] Kristen A. Parillo, “Final Crypto Instructions May Send Mixed Signals,” Tax Notes Today Federal, February 8, 2021, 2021 TNTF 25-5, https://www.taxnotes.com/tax-notes-today-federal/cryptocurrency/final-crypto-instructions-may-send-mixed-signals/2021/02/08/2r46r (retrieved February 6, 2021, subscription required)