Cryptocurrency Tax Q3 2020 Recap

This post covers the cryptocurrency compliance updates in Q3 2020: everything from cryptocurrency on Form 1040 to another round of crypto tax warning letters.

Shehan Chandrasekera, CPA
Shehan Chandrasekera, CPA

September 30, 2020  ·  2 min read

Cryptocurrency Tax Q3 2020 Recap

As we end Q3 2020, let’s look at what happened in the past quarter in the crypto tax compliance world (What Happened In the Cryptocurrency Tax Space In Q2 2020).

Crypto Question Moved to Form 1040

The 2020 draft Form 1040 released by the IRS on August, 18, 2020 shows that the infamous virtual currency question which was first introduced on Schedule 1 for the 2019 tax year has been moved front and center to  Form 1040. With this placement, every US taxpayer filing a tax return in 2020 will have to answer this question and file applicable forms if they have cryptocurrency transactions. This shows how seriously the IRS is looking into the cryptocurrency space.

Financial Rewards To Catch Crypto Tax Evaders

In this quarter, the IRS awarded a $250,000 contract to a crypto tracing software company to help with ongoing crypto tax audits. The criminal investigation division of the IRS also published a $625,00 bounty to anyone who can crack anonymous blockchain transactions on networks such as  Monero and Lightning.

Crypto Users Received Tax Warning Letters, Again

We saw crypto users receiving another round of crypto tax warning letters printed on August, 14, 2020. The IRS first sent these out to 10,000 taxpayers in 2019. The warning letters came in three variations: Letter 6173, Letter 6174, and Letter 6174-A.

In August 2020, we noticed both small and large crypto users getting letter 6174-As. These letters alerted recipients about their crypto tax reporting obligations and recommended amending the tax returns to fix errors and omissions.

Crypto Micropayments Are Taxable

In a memorandum released by the IRS on August, 28, 2020, the service concluded that cryptocurrency received for performing microtasks, for example, completing an online survey or reviewing images, is taxed as ordinary income and may even be subject to self-employment taxes. Even before this memorandum, cryptocurrency received for performing services was taxable as ordinary income. This memorandum reinforced this position and stressed that the payments were taxable “regardless of the value and the manner in which it is received.”

Former Coinbase User Sued The IRS

Jim Harper, a former Coinbase user and a Bitcoin researcher, sued the IRS, its commissioner and up to 10 unnamed agents for violating his privacy and due process rights under the Fourth and Fifth Amendments of the U.S. Harper was one of the recipients of the 10,000 tax warning letters sent out by the IRS in 2019. Harper claimed that he had paid taxes since 2013 and accused the IRS for violating his privacy.

Congress Requests Clarity On Staking

Four congressmen sent a letter to the IRS asking for more clarity on staking related income reporting. The letter advocated that staking rewards should not be taxed at the time of the receipt or discovery similar to other taxpayer-created property such as crops, minerals, livestocks, and artwork. Rather they argued that staking rewards should be taxed only when they are sold.

If you’d like to get ahead of the curve on getting your cryptocurrency taxes done, CoinTracker can help. CoinTracker integrates with 300+ cryptocurrency exchanges and wallets as well as 3,000+ blockchains.

If you have any questions or comments about this change, please let us know on Twitter @CoinTracker.

Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.