5. How does a taxpayer report a transaction in which Bitcoin or other virtual currency is involved?
For the first time ever, the IRS asked about cryptocurrency transactions on taxpayers’ 2020 Form 1040 federal income tax returns. The question asks the taxpayer if they received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during 2020.
However, the IRS also released guidance clarifying that taxpayers who purchased cryptocurrency with “real” currency are not required to answer the question with a “yes” if they had no other cryptocurrency transactions during the tax year because a taxpayer who merely owns cryptocurrency is not taxed on any gains or losses until they sell or otherwise exchange the cryptocurrency. In other words, there has been no realization event that would trigger tax liability.
Dispositions of Bitcoin as property must be reported to the IRS in the same manner as any other intangible property transactions, meaning that the taxpayer will be required to complete and file Schedule D and Form 8949, or Form 4797, to report the transaction in accordance with the instructions to those forms.
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