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IRS updates FAQs on cryptocurrency reporting requirements

Crypto users in the US no longer need to answer yes to the virtual currency question on Form 1040 if they only purchased crypto using fiat currency

The Internal Revenue Service (IRS) of the United States has updated its Frequently Asked Questions on its website’s cryptocurrency section to clarify that digital assets investors who have purchased cryptocurrency using fiat currency like USD or Euro do not need to report their transactions under the virtual currency question.

The clarification has been issued with regards to Form 1040, the first page of the United States citizens’ Individual Income Tax Return form, which has a question dedicated to whether the respondent has received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency” during the financial year.

While the wording of the question on the form suggests that individuals who acquired cryptocurrency through any means–be it US dollars, Kenyan shillings or other cryptocurrencies will be required to answer yes to the question and report it, the latest update has proven otherwise.

The updated cryptocurrency FAQ shows question five which asks whether an individual who “purchased virtual currency with real currency and had no other virtual transactions during the year” must report such transaction(s) to the virtual currency question on Form 1040.

“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”, says the answer.

The new FAQ section suggests that US crypto users who purchased cryptocurrency for USD and did not trade crypto-to-crypto in the last year or sell any of their digital assets for fiat currencies need not report such purchases. Conversely, if crypto was purchased with USD but other crypto-to-crypto transactions were conducted, all details must be reported.

The task of creating a comprehensive tax regulation with regards to digital currencies including cryptocurrencies has been successfully achieved by few countries. With the proposed tax on cryptocurrencies as high as 25% in certain circumstances in countries like South Korea, local tax regulations and declaration of profits earned through trade in digital assets becomes crucial for those who pay using cryptocurrencies and investors alike.

However, regulators have been left playing catch-up as clarity regarding reporting obligations has not been able to keep up the pace with innovation in the virtual currency sector. Republican Representative Tom Emmer noted in a report compiled by the Law Library of Congress that only five countries have established taxation guidance for cryptocurrency users, adding that such clear guidance was necessary for the US  to ensure that tax rules are sensibly applied to avoid deterring innovation.

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