On August 18, 2020, the IRS released a draft Form 1040 for the 2020 tax year (the “Form 1040 for 2020”). The following question appears on the first page of the 2020 Form 1040: “Have you received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency at any time during 2020?” The same question (applies to the tax year 2019) was listed in Appendix 1 to Form 1040 for the 2019 tax year. So far, the IRS has not explained the reason for relocating its request regarding virtual currency. However, this appears to be part of an ongoing effort to gather information about US virtual currency and cryptocurrency users and potentially help taxpayers (who may not do otherwise) file Schedule 1 through Form 1040 as they have no other income or file Deductions) with their tax reporting obligations.
The IRS previously determined that virtual currency would be treated as property and the general tax rules on real estate transactions also apply to transactions in and transactions in virtual currency. Some states have issued guidelines on the VAT treatment of digital currencies. For example, California previously said that paying with Bitcoin does not change the nature of a transaction for sales tax purposes. Hence, a company that accepts bitcoins must collect revenue and use taxes as it would any other sale of tangible personal property (“TPP”) for scrutiny.
More recently, Kansas issued Notice 20-04 dated November 2, 2020 (“Notice 20-04”). Note 20-04 confirms that (i) transaction fees for digital currency transactions are not subject to Kansas sales tax as these fees are not considered a sale by TPP, (ii) a seller making a digital currency payment for a sale Received from TPP is required to collect and transfer sales tax based on the gross receipts it receives in the transaction, measured by the value of the TPP at the time the virtual currency is paid to the retailer (i.e. the digital payment as currency has no effect on the tax liability of the underlying sale) and (iii) the Kansas Treasury does not accept digital currency to pay a taxpayer’s sales tax liability.
It will be interesting to see how states continue to respond to tax issues related to virtual currencies, and we will continue to monitor this evolving area of tax law.
How Manatt can help: Manatt’s tax practice keeps abreast of the various developments relating to the taxation of virtual currencies. We’re here to help clients navigate and understand this evolving area of tax law.
For more informations: Contact Jeffrey A. Mannisto at 310.312.4212 or [email protected] or Jonathan C. Weiss at 310.312.4156 or [email protected].