US crypto firms invest in tax solutions as IRS updates reporting forms

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United States regulators are continuing to fine-tune their tax reporting requirements for cryptocurrency users. A second draft of Form 1040 from the Internal Revenue Service for the 2020 tax season published online suggests that the agency will now require anyone who was engaged in any transaction involving cryptocurrency in 2020 will need to declare it:

“If, in 2020, you engaged in any transaction involving virtual currency, check the ‘Yes’ box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR.”

The draft guidance clarifies that transactions encompass “the receipt or transfer of virtual currency for free” (e.g., via airdrops and hard forks), the exchange of virtual currency for goods or services, the purchase or sale of virtual currency, an exchange of virtual currency for other property, including for another virtual currency, and the acquisition or disposition of “a financial interest in virtual currency.”

Simply holding virtual currency in a wallet or account, or transferring it between two wallets or accounts that are controlled by the same owner, does not count as a transaction for the IRS. 

Those who disposed of virtual currency that is held as a capital asset through sale, exchange or transfer will need to calculate their capital gains and losses, and report them on Schedule D of Form 1040, the IRS outlines.

Against this backdrop of intensifying focus on crypto tax reporting in the U.S, it is perhaps no surprise that big-name industry players are investing in tax solutions providers that could lighten the reporting burden for consumers and businesses alike.

TaxBit, which offers cryptocurrency tax automation software for retail users, exchanges, and merchants, has today announced new investments from PayPal Ventures, Coinbase Ventures, as well as new investment from existing backer Winklevoss Capital.

Answering “yes” to the IRS’s questions does not, notably, imply that individuals who do so are necessarily liable to pay taxes on their crypto for 2020. Cointelegraph has published recent commentary and guidance from crypto tax specialists for U.S. readers, explaining some of the main requirements and developments. 

The new updated draft form does, however, notably provide more clarity as to what kinds of activities exactly count as needing to be declared. An earlier version of the form had sparked concern in the industry for its inadequate and vague formulations, with some commentators going so far as to accuse the IRS of setting a “perjury trap” and sowing confusion.