IRS Says Buying Crypto With Fiat Does Not Trigger Tax Reporting Rules

The U.S. Internal Revenue Service (IRS) said Tuesday it will not require crypto investors who simply bought "virtual currency with real currency" in FY2020 to report that transaction on this year's tax returns.

Delivered on the tax collector's crypto FAQ page, the clarification effectively exempts taxpayers who, say, bought bitcoin with dollars, to check the crypto box on their annual 1040. That new question asks: "At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

The exemption is narrow, however. Investors who swapped one crypto for another, sold their positions or received a token airdrop will still need to check the crypto box under the latest IRS FAQ update.

Taxpayers expressed confusion over whether "otherwise acquire any financial interest" in crypto included the act of buying with fiat, said Shehan Chandrasekera, head of tax strategy for CoinTracker. Even IRS officials have told CoinDesk that some of the agency's crypto regulations "are not ideal."

"Quite frankly, buying cryptocurrency using [U.S. dollars] is not a taxable event. So, I don't see any reason why taxpayers have to disclose that to the IRS by checking the box," Chandrasekera said.

Chandrasekera said the update will likely fail to clarify reporting burdens. For starters, the IRS unveiled its crypto question with little fanfare and has rolled out this new language update largely behind the scenes.

Taxpayers who are not familiar with the FAQ page will almost certainly interpret "otherwise acquire" to include buying with fiat, he said, and thus they'll check the box.

He also questioned the logic behind kneecapping what industry experts called a crypto tax cheat dragnet.

"From just a collection standpoint it doesn't really make sense for the IRS to have this broad question that is, I guess, self-limiting. But then on the privacy standpoint it's much better for the tech privacy-focused taxpayers, that they don't have to divulge information over what is a nontaxable event," he said.