Taxable Talk

I haven’t posted that much this year for a few reasons. I’ve had some family issues (and that takes priority over just about everything), and this was a difficult tax season. Now that Tax Season is over, I’m going to be increasing my posting. The next few posts are all going to be looking at cryptocurrency (what the IRS calls “virtual currency”) because there’s been a lot of activity in this area over the past few weeks.

Today, we’re looking at an upcoming issue. During the second half of each year, the IRS releases draft tax forms for the following tax season. The IRS gets industry comments, and it also alerts both software makers and tax professionals of upcoming items. Here’s the top of the draft Schedule 1 for 2019:

The question reads, in full, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

The IRS thinks that some taxpayers just might not be telling the truth about cryptocurrency. This question means that if you own any cryptocurrency and had any transactions in 2019, you need to check a box. It’s similar to the boxes on the bottom of Schedule B asking about foreign financial accounts.

Tax returns are filed under penalty of perjury. Thus, a taxpayer who answers that question “No” when he or she is trading virtual currency would be committing perjury. Indeed, it’s yet another way the IRS is looking into cryptocurrency transactions.

Kelly Erb, who alerted me to this new question, believes the location of the question is poor. I agree. An individual who sells cryptocurrency must complete Schedule D and Form 8949. That individual might not include Schedule 1 on his or her tax return. If you’re looking for improving compliance with the law, the question should be asked where impacted individuals will see it. The IRS will take comments for the next 17 days on the draft form, and I have suggested to the IRS that the question be put on Schedule D rather than Schedule 1. (If you want to comment, you can send an email to WI.1040.Comments@IRS.gov. Note that the IRS does not respond to each comment, but absolutely does look at the comments and considers them before making draft forms final.)

A client was in my office toward the end of September to finalize his 2018 returns. He had a lot of cryptocurrency transactions, but the overall gain or loss was about $100. As we attached a listing of his thousands of trades to his tax return, he asked if I thought someone would be prosecuted over cryptocurrency. I strongly believe that IRS criminal investigation will look at making an example of someone. There’s likely a kid in Dubuque or Dallas or Denver who made $3 million in cryptocurrency and thinks it’s “free money.” It’s not–accessions to wealth are, by definition, income and all income not exempted by Congress is subject to income tax. As always, it’s a whole lot easier to simply pay your tax than not do so.