IRS Revises Virtual Currency Transaction List in Final 1040 Instructions.

The final version of the instructions to Forms 1040 and 1040-SR has revised the non-exhaustive list of transactions involving virtual currency by removing the purchase of virtual currency and the acquisition of a financial interest in virtual currency from the list. The list is used by taxpayers to determine how they answer the question on Form 1040 and 1040-SR on whether they have received, sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency during the year.

For the 2020 tax year, a taxpayer will need to answer the question on page 1 of Form 1040, U.S. Individual Income Tax Return, or 1040-SR, U.S. Tax Return for Seniors, which asks, "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?" 

A draft version of the 1040 instructions released in December 2020 included a list of transactions involving virtual currency. The draft 1040 instructions read:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork;

• An exchange of virtual currency for goods or services;

• A purchase or sale of virtual currency;

• An exchange of virtual currency for other property, including for another virtual currency; and

• An acquisition or disposition of a financial interest in virtual currency."

The final version of the 1040 instructions has revised the list of virtual currency transactions. The final 1040 instructions read:

"A transaction involving virtual currency includes, but is not limited to:

• The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;

• An exchange of virtual currency for goods or services;

• A sale of virtual currency;

• An exchange of virtual currency for other property, including for another virtual currency; and

• A disposition of a financial interest in virtual currency."

Thus, "a purchase of virtual currency" and "an acquisition of a financial interest in virtual currency" have been removed from the list.

The fact that these two things were removed from the list does not necessarily mean that they are therefore not virtual currency transactions. First, the list is not exhaustive since it "includes, but is not limited to" what is listed. Second, the question on the Form 1040 asks explicitly whether a taxpayer has received or acquired a financial interest in virtual currency. 

It would seem that, regardless of what is on the list in the instructions, if a taxpayer purchased virtual currency, or acquired a financial interest in virtual currency, then the taxpayer would be required to answer yes to the virtual currency question on the Forms.

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