IRS issues digital asset updates to staff manual and draft Form 1040


Authored by RSM US LLP

The Internal Revenue Service (IRS) recently issued updates to their internal staff manual (CC-2020-003) regarding the review of virtual currencies (digital assets) and released a new draft Form 1040 that changes placement of a virtual currency question, suggesting a renewed focus on virtual currency transactions by taxpayers. 

The updated IRS manual now outlines when Chief Counsel attorneys are required to coordinate with the National Office due to digital asset activity, setting forth as a ground for coordination any “[i]ssues involving virtual currency… not addressed by Notice 2014-21 or other public guidance, involving novel issues or issues likely to attract national attention.” While the updated manual excludes returns where the only issue is substantiation, it does indicate any return with virtual currency activity, other than the buying and selling of virtual currencies, have a much higher probability to be elevated to the IRS National Office for review. 

Separately, a new draft of Form 1040 has elevated a question asking the taxpayer to confirm whether or not they engaged in digital asset activity. The 2019 Form 1040 asked the question on Question 1 of Schedule 1 – the draft 2020 Form 1040 places the question in the personal information section, or the top half of the first page. It even precedes the standard deduction elections. This move will force nearly all taxpayers to answer the question and aid the agency in its information collecting efforts.

Digital asset tax compliance continues to be a changing area of taxation. In light of the IRS’s heightened digital asset compliance review and enforcement, taxpayers with digital asset transactions should consult their tax advisors to ensure their digital asset tax position is in compliance.