The IRS has released a new draft of the instructions for Form 1040 and Form 1040-SR, U.S. Tax Return for Seniors, that incorporates recently legislative changes made by the Consolidated Appropriations Act, 2021 (CAA, 2021, PL 116-260). The draft instructions also contain other new information including information about virtual currency reporting.
Background.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) provided for direct payments/rebates to certain individual taxpayers. These were referred to as Economic Impact Payments (“EIP 1”). EIP 1 is actually an advance payment of a recovery rebate credit.
COVID-Related Tax Relief Act (COVIDTRA), part of CAA, 2021, provides for another round of direct payments/rebates to certain individual taxpayers for 2020. These are referred to as EIP 2.
IRS released a previous draft of the instructions to Form 1040 and Form 1040-SR in October 2020. See Draft 2020 Form 1040 instructions revise virtual currency transaction information (11/04/2020)
In 2019, the IRS added the question, “At any time during [the tax year], did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” to the Form 1040.
In the October 2020 draft instructions, the IRS said that a transaction involving virtual currency does not include the holding of virtual currency in “a wallet or account,” or the transfer of virtual currency from one wallet or account the taxpayer owns or controls to another that the taxpayer owns or controls.
The October 2020 draft instructions also noted that, “A transaction involving virtual currency includes:
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork;
- An exchange of virtual currency for goods or services;
- A sale of virtual currency; and
- An exchange of virtual currency for other property, including for another virtual currency.”
What’s new—CAA, 2021 changes.
The new draft instructions point out the following changes made by the CAA, 2021:
EIPs. The draft instructions now refer to the first round of EIPs provided by the CARES Act as EIP 1 and the second round provided by COVIDTRA as EIP 2. The draft instructions comment that “Any economic impact payments you received are not taxable for federal income tax purposes, but they reduce your recovery rebate credit” remains the same as in the October draft.
Recovery rebate credit. The draft instructions say that this credit is figured like EIP 1 and EIP 2, except eligibility and the amount of the credit are based on the taxpayer’s tax year 2020 information. The instructions include a Recovery Rebate Credit Worksheet to figure a taxpayer’s credit amount.
Other taxpayer relief. CAA, 2021 also provided certain other tax-related benefits that are discussed in the draft instructions (note that the line numbers mentioned below refer to both Form 1040 and Form 1040-SR):
- Election to use 2019 earned income to figure 2020 earned income credit. The instructions for line 27 contain more information on this election.
- Election to use 2019 earned income to figure 2020 additional child tax credit. The instructions for line 28 and the Instructions for Form 8812, Additional Child Tax Credit, contain more information on this election.
- Educator expenses include amounts paid or incurred after March 12, 2020, for personal protective equipment, disinfectant, and other supplies used for the prevention of the spread of coronavirus. See the instructions for Schedule 1, Additional Income and Adjustments to Income, line 10.
- If a taxpayer was impacted by certain federally declared disasters, special rules may apply to distributions from the taxpayer’s IRA, profit-sharing plan, or retirement plan. See Pubs. 590-B and 575 for details.
What’s new—virtual currency.
The new draft instructions say that, “Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency.”
The instructions then say that, “The IRS uses the term ‘virtual currency’ to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.”
Observation.
This definition of virtual currency (including the statement that regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes) matches the definition that the IRS uses in its FAQs regarding virtual currency transactions.
The new draft instructions also revise the list of what transactions include. The draft instructions now read:
“A transaction involving virtual currency includes, but is not limited to (revisions in italic):
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork;
- An exchange of virtual currency for goods or services;
- A purchase or sale of virtual currency;
- An exchange of virtual currency for other property, including for another virtual currency; and
- An acquisition or disposition of a financial interest in virtual currency.“
What’s new—other.
One additional change is that the draft instructions now say that if a taxpayer is filing Form 4952, Investment Interest Expense Deduction, and the taxpayer has an amount on line 4e (the smaller of the taxpayer’s
- Net gain from the disposition of property held for investment or
- Net capital gain from the disposition of property held for investment) or 4g (certain amounts elected to be included in investment income), then the taxpayer must use the Schedule D Tax Worksheet in the Instructions for Schedule D, Capital Gains and Losses, to figure the taxpayer’s tax, even if the taxpayer doesn’t need to file Schedule D.
To continue your research on information on EIP 1, see FTC 2d/FIN ¶A-4460. For information on EIP 2, see FTC 2d/FIN ¶A-4430.
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