When Acquire Doesn’t Mean Acquire

It’s time for today’s lessen in double-speak, or bureaucratese, courtesy of the IRS.  On the top of Form 1040, just below your address is a question:

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

It seems simple: If you bought any cryptocurrency, sold any, exchanged any, sent some, or received any, check the box marked “Yes.”  Except that’s wrong, per the IRS.  On March 2nd, the IRS updated their Frequently Asked Questions (FAQ) on cryptocurrency.  If all you did was acquire (purchase) cryptocurrency, you can answer no:

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? (3/2/21)

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. [emphasis added]

As the National Taxpayer Advocate pointed out, the IRS wants information on individuals who had reportable sales of cryptocurrency.  That would be sales, exchanges, and spending; it would also include individuals who received cryptocurrency for free (but not gifts).  The IRS wants to make sure individuals who have taxable events with cryptocurrency have reported them on their tax returns.

Is it a problem if you answered “yes” but all you did was acquire cryptocurrency?  Definitely not.  The question is poorly written, and you answered truthfully based on the question.  However, you might end up receiving an IRS notice if the IRS computer looks for taxable cryptocurrency activity on your return and doesn’t see any.  The solution, which likely will be adopted for 2021 returns, is to change the question to read, “At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency in a reportable transaction?

I give the IRS an “A” for knowing that many individuals are not reporting cryptocurrency activity on their tax returns, and a “D-” for writing questions.


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