AICPA Submits Comments on Virtual Currency Question on Form 1040 and Instructions

The American Institute of CPAs (AICPA) has submitted comments to the Internal Revenue Service (IRS) regarding the virtual currency question on the 2021 Form 1040, U.S. Individual Income Tax Return and instructions (and its variations including the 2021 1040-SR, U.S. Tax Return for Seniors, and 1040-NR, U.S. Nonresident Alien Income Tax Return) and draft 2022 Form 1040 (as of July 27, 2022). The AICPA is requesting that the question can be clarified before the 2022 forms are finalized in order to provide greater certainty to taxpayers and their preparers and to aid them in complying with the question and overall reporting requirements for virtual currency.

The AICPA has submitted the following recommendations to be considered for the finalized 2022 Form 1040 and other variations of Form 1040:

Clarify the meaning of virtual currency.
1. AICPA recommends the IRS modify the definition of virtual currency as described in the first paragraph of the Form 1040 instructions to make it consistent with the definition in Rev. Rul 2019-24 and Notice 2014-21. The definition in the instructions should state that the IRS uses the term “virtual currency” to refer only to convertible virtual currency. Additionally, examples of convertible virtual currency should be included.
2. Clarification on whether the terms “unit of account,” “store of value” and medium of exchange” must all be present or if just one must be present.
3. Each of these terms should be defined.
4. Reference to any asset with the “characteristics of virtual currency” should be removed as this is not part of IRS official and binding guidance, creates confusion and is potentially broad beyond the definition of virtual currency provided by the IRS.
Do not ask about “digital assets” until this term has been defined in final regulations under Section 6045.
1. AICPA recommends that the virtual currency question on page 1 of Form 1040 continue to use the term “virtual currency” until final regulations are issued to officially define the term “digital asset” as added to Section 6045 by the Infrastructure Investment and Jobs Act.
Modify the virtual currency question for simplicity and clarity.
1. AICPA recommends the Form 1040 virtual currency question be modified as follows:
  1. At any time during 2022, did you have a taxable event involving virtual currency? See instructions.

___ Yes ___ No

Include additional elements into the Form 1040 instructions for the virtual currency question.
1. In addition to the AICPA’s recommendation to simplify and clarify the virtual currency question, the IRS should include the following elements into the Form 1040 instructions for the virtual currency question:
  1. Definition of virtual currency as recommended
  2. Provide examples of taxable and non-taxable events in line with new wording
Explain if a taxpayer needs to answer “yes” if a dependent had a virtual currency event but does not have a filing requirement.
1. AICPA recommends the instructions specify that a virtual currency event of a child or dependent claimed on the return does not require the individual filer to answer “yes.”
2. Instructions should also state that an individual filer who otherwise does not have a filing obligation is not required to file Form 1040 just to answer “yes” to the virtual currency question.

“Taxpayers and their advisors want to comply with IRS guidance on virtual currency, but they lack adequate instructions to do so,” said Annette Nellen, Chair of the AICPA Virtual Currency Task Force. “We strongly urge the IRS to consider our recommendations, which will facilitate compliance from taxpayers on these important issues that affect a growing number of taxpayers.”