The IRS has continued with their system of guidance by FAQ, this time effectively overriding the plain language of a question on page one of Form 1040 by adding a new question to the frequently asked questions (FAQ) page on the IRS website dealing with virtual currencies.[1]

The IRS added a question to the front page of Form 1040 that asked “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The initial draft of the instructions for Form 1040 indicated that a purchase of a virtual currency during the year would require a yes answer—which seems like the correct answer given that trading cash for a virtual currency would seem to be the textbook case for obtaining a financial interest in the virtual currency.

But, as was noted in an article we posted in February on the issue,[2] the IRS a week later published the final instructions for Form 1040, and those instructions removed the examples that showed purchasing such currency would require a yes answer. However, the final version of Form 1040 was not changed, and the question remained worded just as it did before.

The IRS informally indicated that the change meant that taxpayers should answer “no” to the question if all they did was purchase such currency[3] but until March 2 nowhere did the IRS have that advice in writing.

Now the IRS has updated its virtual currency FAQ web page to specifically address this issue, adding question and answer 5 which provides the following:

Q5. The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question? (3/2/2021)

A5. No. If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.[4]

While helpful, the FAQ pages can be changed by the IRS (including being taken down) at any time, so it would be more helpful if the IRS issued more formal guidance (such as an Announcement or Notice) or even a revised set of instructions that specifically contained the guidance found in the FAQ.

Otherwise a taxpayer may find him/herself dealing with a question later if the IRS or, more likely, another party (say counsel trying to argue the individual is hiding assets in a civil case) asks the individual why they “lied” in responding to the question, since they clearly had acquired a financial interest in a virtual currency.

[1] “Frequently Asked Questions on Virtual Currency Transactions,” IRS webpage, March 2, 2021, https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions (retrieved March 4, 2021)

[2] Edward Zollars, “IRS Revises Instructions to Virtual Currency Question, but Not Actual Question, Creating Uncertainty on What Answer is Appropriate in Some Cases,” Current Federal Tax Developments website, February 6, 2021, https://www.currentfederaltaxdevelopments.com/blog/2021/2/6/irs-revises-instructions-to-virtual-currency-question-but-not-actual-question-creating-uncertainty-on-what-answer-is-appropriate-in-some-cases (retrieved March 4, 2021)

[3] 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 March 4, 2021, subscription required)

[4] “Frequently Asked Questions on Virtual Currency Transactions,” IRS webpage, March 2, 2021, Question 5