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Zhanna Ziering Speaks to Tax Notes on Draft Instructions to IRS Form 1040 Regarding Reports of Virtual Currency

January 8, 2021, Tax Notes

The IRS has posted revised draft instructions for Form 1040 that explicitly tell taxpayers to check “yes” if they purchased virtual currency in 2020.

The draft instructions, dated December 31, 2020, give more insight into what constitutes reportable virtual currency transactions than did the previous version released October 23, 2020. However, some practitioners worry that the latest revisions could confuse less sophisticated users of virtual currency.

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Zhanna A. Ziering of Caplin & Drysdale said she is concerned about the language added to the definition of virtual currency that says, “Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.”

It’s possible that the phrase “characteristics of virtual currency” refers to the preceding sentences in which the IRS explains what virtual currency is, said Ziering. “But clarity on what exactly are the characteristics would be welcome,” she noted.

The addition of the phrase “but is not limited to” before the bullet-pointed list of reportable virtual currency transactions also injects more ambiguity into the question of what constitutes a reportable transaction, said Ziering.

Another source of uncertainty is that taxpayers still don’t have clear guidance on what it means to acquire a financial interest in virtual currency during the relevant tax year, Ziering said. That question could become more complicated given the recent announcement by Treasury’s Financial Crimes Enforcement Network that it will amend regulations to make virtual currency accounts subject to foreign bank account reporting requirements.

“While colloquially [having ‘a financial interest in’] means you personally own it, once virtual currency is included in the FBAR regulations, the scope of financial interest — unless modified specifically for virtual currency — will be much broader,” said Ziering. 

For the full article, please visit Tax Notes’ website (subscription required).

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