While its well-known that the revised Schedule 1 form for U.S. taxpayers now contains a question about cryptocurrencies, what is lesser discussed are the legal ramifications this may have for filers who answer incorrectly. The vague nature of the yes or no inquiry has one tax expert doubting the constitutionality of the question, urging all filers to answer ‘yes’ to avoid bitcoiners being unfairly targeted. Further, as anything from frequent flyer miles to credit card points could technically fall under the IRS definition, answering yes could save some from a felony charge, according to the source.
Also read: IRS Now Requires Tax Filers to Disclose Crypto Activities
The Dreaded Crypto Question
“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” the 2019 Schedule 1 question reads.
The problem here according to Enrolled Agent Clinton Donnelly of Donnelly Tax Law, is that the inquiry is not only illegal, it’s also far too vague. The question “violates many of the taxpayer’s constitutional rights and is a disturbing overstep of what Congress has authorized the IRS to do,” Donnelly told news.Bitcoin.com. “There is no law supporting this question in tax law.” He elaborated:
This question has a chilling effect on First Amendment Rights. It violates taxpayers’ legal protections, violates the excessive fines clause of the Eighth Amendment, along with the due process and equal protection clauses of the Fifth Amendment.
Donnelly says that taxpayers should not have to report buying crypto unless in an audit. They only need to report selling it. “The tax law requires reporting income, including capital gains from the sale or exchange of cryptocurrencies. But to ‘receive’ or ‘acquire any financial interest in any virtual currency’ is not something that must be reported to the IRS under Title 26.” Here he refers to Title 26 of the Internal Revenue Service Code.
Donnelly notes that “declaring that ‘under penalties of perjury, I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete,’ puts the taxpayer in a position of committing a felony for giving the wrong answer.”
He goes on to detail that under the IRS’s definition of virtual currency, even frequent flyer miles and points cards could put people in hot water:
From IRS Notice 2014-21: ‘Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.’ This definition includes many things other than cryptocurrency.
“The way the IRS defines virtual currency is as a store of value,” Donnelly goes on. “Frequent Flyer miles are a store of value. Customer Loyalty cards are a store of value. Credit card points to buy things are a store of value. Therefore, it behooves every American to check yes to the Schedule 1 question.”
Though the IRS issued new information on policy last year, meant to supplement 2014’s guidance, the definition of virtual currency remains vague, and open to broad interpretation.
To Disclose or Not to Disclose
Many might disagree with Donnelly, preferring to answer “no” than have a potential audit or investigation on their hands. But that all depends on what the agency knows. If someone’s downloaded a crypto wallet and answers in the negative, that could be a red flag for the agency. The IRS has not been helpful in clearing things up, either, with repeated calls from crypto holders and politicians alike for greater clarification on their seemingly cobbled-together policy.
According to Donnelly, it’s an issue of solidarity. “Answering yes is not only accurate, but the IRS is also clearly going after cryptocurrency holders with this question,” he emphasizes. “We need solidarity. We can’t allow the IRS to target a segment of society.” The tax professional summarizes:
The safest strategy is for everyone to answer yes to this question. Doesn’t this put me on a list? Yes, but if it is a list with every other Americans’ name on it, it will prove to be a very useless list for the IRS to pursue.
Tumultuous Times This Tax Season
With coronavirus panic gripping the world, markets plunging, medical martial law being instituted, and talk of aid money being given to citizens to help weather an unemployed period of quarantine, many are asking why they should pay taxes this year anyway. Donnelly posted a poll to his Twitter profile addressing the subject of tax deadline extensions due to the virus:
Because of the #coronavirus emergency, should the President grant all taxpayers an automatic extension to file their #IRS personal #taxreturns?
— Clinton Donnelly (@CryptoTaxFixer) March 11, 2020
One user replied to Donnelly’s Twitter poll by saying:
Taxes=Theft…taxes should be completely eliminated forever…taxes are just plain robbery from the biggest criminal association in the universe..’Government’
That may be the case, but theft or not, the IRS wants your money and is serious about getting it. When it comes to whether it is best to check yes or no on the infamous Schedule 1 crypto question, that’s still largely anybody’s guess. Donnelly contends the question is an “unconstitutional overreach,” however, and should be withdrawn.
What do you think of Clinton Donnelly’s view on answering ‘yes’ to the crypto question? Could solidarity keep bitcoiners from being unfairly targeted by the IRS? Let us know in the comments section below.
Disclaimer: This article is for informational purposes only. It is not an offer or solicitation of an offer to buy or sell, or a recommendation, endorsement, or sponsorship of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Image credits: Shutterstock, Em Campos, fair use.
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