Bitcoin issues

[RWG1950]

My new customer tells me that he acquired some Bitcoin prior to 2020.
He acquired none in 2020 and hadn't sold or used any of it until early in 2021.
As I read the IRS virtual currency question on the 1040, it would seem my customer has nothing to report
on his 2020 return & can answer no to this question. (2021 will be another matter)
Anybody feel that I am misunderstanding this ?
Thanks for comments.

[BOB W]

If it was my client I would answer NO and fill out prior year purchase info. While it asks about current year info I think it does require previous purchases.

[BP.]

IRS FAQ on Virtual Currency

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.

I know you mentioned no purchases in 2020, but maybe this recent update is informative for 2021.

[BOB W]

This is very confusing. My simple mind cannot deal with this confusion. Purchases don't count?????
Why does my program have an entry dropdown to record purchases...???

[Dude]

I thought they would start looking at this with more scrutiny, instead they treat it like those out of state purchase made to avoid sales tax: self report. On the other hand it seems like they really got the process for the $42 people make for Jury Duty down pat.

[RWG1950]

I checked the IRS website and looked up virtual currencies. They have a Q&A on this subject.
Apparently, I can safely answer NO to the virtual currency question (even if Bitcoin was acquired in 2020) as long as
it was acquired with "real" (legal tender) currency and not used, redeemed or sold or involved in any other transactions.

[BOB W]

Here is my simple mind again, are you saying bitcoin can be SOLD and exchanged for legal currency and still answer NO?

[Lion]

No, if you sell it, you've sold a capital investment that gets reported, gain or loss. But, if you buy it for cash, like buying a capital investment, the purchase is not a reportable action. Think stocks. It's not currency, per the IRS.

[Anarchrist]

The Y/N question on the 1040 asks, "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

The 1040 instructions state on p. 16, "A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control."

The answer to the OP's 2020 situation is "no".

Obviously, if one received or purchased bitcoin in 2020, the logical and truthful answer to the Y/N question on the 1040 is "yes". The instructions state that the answer in this situation is "yes". The FAQ currently on the irs website says the answer is "no". FAQs are not recorded in the permanent record. The irs changes FAQs on a weekly basis. How much are you willing to bet the FAQ still states the answer to the question in this situation is "no" two years from now when the client is being audited?

[BOB W]

No, if you sell it, you've sold a capital investment that gets reported, gain or loss. But, if you buy it for cash, like buying a capital investment, the purchase is not a reportable action. Think stocks. It's not currency, per the IRS.

Well that is simple enough for simple me to understand, Thanks............. But I think there is more to this bit coin question than just selling.

[Dude]

Wonder if the IRS will assign a default basis to those who sell but did not report the purchase? Considering the volatility of virtual currency ramifications could be significant.

[BOB W]

IRS's usual default basis is ZERO.

[Dude]

IRS's usual default basis is ZERO.

my point exactly

[Lion]

Bob W, oh yes, there's more than just selling, at least what our clients will think is selling. There's exchanging virtual currency from one kind to another, using it to purchase goods and services, and other uses and changes and dispositions that the IRS considers as "selling." And, there's receiving virtual currency in exchange for goods and services and receiving it via "mining" and receiving it by letting an exchange lock up/use your coin and receiving partial coins for watching a video or ad and...so many ways to receive virtual currency other than buying a coin with cash/cash equivalent. So far, none of my clients have virtual currency. But I think I'll send them elsewhere if they start. Too much to learn with all the tax law changes I'm already dealing with!

[BP.]

oh yes, there's more than just . . . .

Oh yeah, lots to track. Client is using a paid service (Coin Tracker) to manage all this for him. Otherwise, I wouldn't want the file either.