When you complete the questions in your 2019 organizer, pay special attention to the last question in the Income section, “At any time in 2019 did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This ‘Yes’ or ‘No’ question will appear at the top of Schedule 1 on your 2019 return and must be answered in order to pass e-filing requirements.
With the increased use of virtual currencies such as BitCoin, the IRS is getting serious about the taxation of this type of property. In October of 2019, the IRS released an authoritative Revenue Ruling along with a question-and-answer document that provide guidance on how to report income from virtual currency holdings.
The IRS requires taxpayers to track their crypto transactions to prove how much they bought, so they can determine how much they owe when they sell. An investor also must document transfers of coins between two accounts, known as wallets, to prove to the IRS that the transaction is tax-free.
The guidance also addresses auto-generated cryptocurrency such as when a coin splits in a transaction, known as a “hard fork” and when coins are distributed through a so-called air drop. These types of transactions always trigger a tax obligation, even though they are created by a third party. This ruling is retroactive, so taxpayers can be taxed (and penalized) for income received and not reported on back year returns.
The link to the Virtual Currency FAQs on the IRS website is below: