Here are a couple of federal tax updates relating to cryptocurrency, courtesy of our colleagues at the AICPA Journal of Accountancy.
Form 1040 virtual currency query revised for 2021
A draft version released in July of Form 1040, U.S. Individual Income Tax Return, for the 2021 tax year on page 1 retains the question from 2020 regarding cryptoassets but words it differently: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” (emphasis added). The 2020 form (and 2019, although the question then appeared on Schedule 1) asked: “At any time during [the tax year] did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” (emphasis added). The new wording, substituting “dispose of” for “acquire” and omitting “send,” is consistent with the 2020 instructions for Form 1040 that, in their final form, deleted from draft instructions purchases and acquisitions of virtual currency or financial interests in it, although the question itself for that year retained “acquire.”
Jason Tyra CPA Comment- For 2019 and 2020, we recommended a literal interpretation of the terms “receive” and “acquire” to encompass any circumstance under which a taxpayer came into possession of virtual currency during the year. Taxpayers generally are not harmed by over-reporting (i.e. a “yes” when the answer technically could have been “no”), but could be held liable for an inaccurate answer if selected for audit.
Certain pre-TCJA cryptoasset trades are not like-kind
IRS Chief Counsel Advice 202124008 stated that exchanges of bitcoin for certain other cryptoassets did not qualify for gain nonrecognition as like-kind exchanges under Sec. 1031 (before that section was amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, to exclude personal property, effective for exchanges after Dec. 31, 2017). Specifically, an exchange of bitcoin for ether, bitcoin for litecoin, or ether for litecoin did not qualify as a like-kind exchange, the Chief Counsel’s office advised.
The “vast majority” of cryptoassets other than bitcoin or ether (such as litecoin) must first be exchanged for bitcoin or ether before conversion into fiat currency, the Chief Counsel’s office said. Thus, bitcoin and ether are different in nature and character from litecoin and not of like kind with it under Sec. 1031. Furthermore, bitcoin and ether are different in nature and character from each other, since the Ethereum blockchain through which ether operates, besides acting as a payment network like Bitcoin, also is a platform for smart contracts and applications, the Chief Counsel’s office said.
Jason Tyra CPA Comment- The technical distinction between Ether and other virtual currencies in the context of a like-kind exchange is an unexpected development, as is the explicit acceptance of such treatment under some conditions by the IRS. However, tax years when this position would have been allowed (2017 and prior) are now outside the statutory limitation period for most taxpayers, so the Chief Counsel’s advice is likely moot.
-Excerpted from the Journal of Accountancy, October 2021 issue