Tax Changes for Crypto Investors

For years, the IRS has been working to catch up to the world of virtual currency and crypto assets. These investing technologies are evolving at break-neck speeds, while the IRS, being a large government agency, tends to move more akin to a snail’s pace.

This article highlights two interesting tax changes put forward by the IRS that affect virtual currency and crypto asset investors.

This past summer, the IRS published a draft version of the 2021 Form 1040 (U.S. Individual Income Tax Return). The draft form includes several changes to the wording of the question asking taxpayers if they have investments in virtual currency. The 2020 and 2019 forms asked, “At any time during [the tax year] did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” The 2021 draft form asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

The wording may seem similar, but the updated version brings the form’s text in line with the form’s instructions and the IRS’s intent to prevent taxpayers from avoiding taxes through the use of virtual currency or crypto assets.

In another recent development, the IRS Chief Counsel’s office issued Advice 202124008, which states that exchanges of bitcoin for certain other crypto assets did not qualify for gain nonrecognition as like-kind exchanges under Section 1031. 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 noted that most crypto assets other than bitcoin or ether must be exchanged for bitcoin before conversion into fiat currency. The Chief Counsel’s office argues that this condition means that bitcoin and ether are different in nature from litecoin and not of like kind with it under Section 1031.

Have more questions about how virtual currency or crypto asset investing will impact your tax return? Schreiber Accounting and Advisory can help with tax preparation and planning services. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.