There’s been plenty of discussion in recent years about cryptocurrency in general, and among the tax community the taxability of cryptocurrency in its many forms and transaction types, including things like in-game currencies and bitcoin. If you’ve started working on your 2019 tax return, or perhaps handed those duties off to your trusted tax professional, you may have noticed that there is a new question on Schedule 1 of Form 1040. Bearing similarity to the foreign bank account question that appears on Schedule B, it is a simple yes/no question, but answering correctly can be more difficult than you may think. And should you be required to answer yes to this seemingly innocuous inquiry, your taxes can become significantly more complicated as well.
The specific wording of the question is “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” Well that seems pretty easy, right? I didn’t sell any Bitcoin, so obviously that’s a quick no, and moving on with the rest of this darn tax return. Not so fast though – the sticking point of this question is the last three words. What exactly is “any virtual currency”? In late 2019, the IRS attempted to help define virtual currency by releasing a blurb on their website, referring to convertible virtual currencies as including Bitcoin, Ethereum, Roblox, and V-bucks. At this point most everyone is aware of Bitcoin – I recall my grandmother asking me if she should buy it. Ethereum is also well known, even amongst non-crypto enthusiasts. But those other two? What’s a V-buck? Well, they are both currencies used in online video games, and V-bucks are the specific in-game currency used in the massively popular game Fortnite. You’ve likely heard of it if you have kids (maybe even adult kids – heck, I’m 31 and am guilty of obtaining a financial interest in V-bucks.)
Predictably word spread quickly among tax professionals, and eventually among more casual readers, both groups rightfully concerned that their kid buying a cool new outfit in Fortnite just put them on the IRS’ cryptocurrency radar. After receiving certainly far more feedback than expected as a result of this blurb, the IRS gave taxpayers some love on February 14 – a statement was issued that the language used in their prior communication caused concern for some taxpayers, and clarified that transacting in virtual currencies as part of a game, that do not leave the game environment, would not require any additional tax reporting. Parents (and 30-something tax managers) everywhere were so happy they just had to floss in celebration!
For more on cryptocurrency, check out my in-depth article addressing some of the more technical points of virtual currencies, as well as their tax treatment. Stay tuned for more updates on the taxation and reporting requirements of virtual currencies, and be sure to reach out to your Henry+Horne tax adviser if you think you may need to answer “Yes” to that scary new question.
-Austin Bradley, CPA