In the midst of tax information reporting season, several items caught our eye in January. There were a few subtle developments in the realm of cryptocurrency tax disclosures. Also, under the auspices of the pandemic relief legislation passed at the end of 2020, the IRS has since published a notice waiving Form 1099 filing requirements for certain payments and cancellation of debt that are excluded from income under the COVID-19-relief provisions. On the legislative front, there was again some talk of a financial transactions tax. Finally, we provide a few updates on IRS publications.
- Changes to IRS individual tax return instructions on virtual currency and a FINCEN notice on expected changes to reporting cryptocurrencies on FBARs will likely increase taxpayer angst over crypto taxation and consequently customer demand for brokers and other crypto facilitators to provide better crypto tax data.
- Notice 2021-06 waives Form 1099 filing requirement on specific instances under 2020 pandemic relief legislation where payments or forgiveness of debt are not includible in income, but Form 1098 requirements are not waived.
- In Congress, Representative Peter DeFazio has reintroduced a bill to implement a financial transactions tax that may have better prospects than prior FTT attempts given a new administration in Washington and spending initiatives that may require supporting tax revenue.
1. Cryptocurrencies on our mind
With bitcoin price volatility constantly in the headlines in January, we could not but think about cryptocurrency taxation. And perhaps neither could the IRS nor the U.S. Treasury.
Form 1040 instruction changes
In a revised set of instructions to the Form 1040 individual tax return released on 31 December 2020, the IRS expanded on its October draft discussion of when taxpayers should report on virtual currency transactions and what such transactions are. The IRS then made a further subtle change to the virtual currency discussion when it issued final instructions on 6 January 2021.
As we have noted before, the IRS has moved its question asking whether the taxpayer has engaged in virtual currency transactions from Schedule 1 to the front page of Form 1040. The question reads: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
Both prior year and current instructions state that an individual should check “Yes” if the individual engaged in any transaction involving virtual currency for the calendar year of the return. The December draft instructions added to the list of reportable virtual currency transactions the “purchase” of virtual currency as well as a disposition of a “financial interest” in virtual currency.
Interestingly, the “purchase” of virtual currency was excluded from the 6 January final instructions. Likely this is because a purchase of virtual currency itself should generally not give rise to a taxable event that needs to be reported.
The inclusion of the item in the December draft instructions and the exclusion in the final instructions would seem to suggest that purchases of cryptocurrencies without a sale does not require a “Yes” response. But the crypto question on the form itself is relatively broad. And the instructions do not specifically exclude this.
In fact, the December draft and final instructions expand on the definition of virtual currency.
They note that virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency, that functions as a unit of account, a store of value, or a medium of exchange. But, in addition, the instructions specifically state that “[r]egardless 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.”
The updated instructions further clarify that the list of virtual currency transactions in the instructions is not exclusive. The list is preceded now by the words “but is not limited to.” This to encourage over-disclosure rather than under-disclosure.
Changes to FBAR reporting
In addition to the updated virtual currency Form 1040 instructions, the U.S. Treasury Financial Crimes Enforcement Network (FINCEN) issued at the end of December the ever-so-brief Notice 2020-2 that indicated its intent to amend regulations to include foreign holdings of virtual currency as reportable on the annual reports of foreign bank accounts (FBARs).
Individuals are generally required to disclose foreign financial accounts in which they have an interest or signature authority on an FBAR if the value of the accounts exceed $10,000 in a calendar year.
A similar tax disclosure is required on IRS Form 8938 for both foreign financial accounts and certain other specified financial assets that exceed annual value thresholds that differ depending on domicile and tax-filing status.
Impact to institutions facilitating crypto transactions
The push by governmental authorities toward crypto tax disclosures, tax reporting and enforcement will likely increase individual angst over correct tax reporting and disclosures. Given the pressure to correctly report crypto transactions, retail customers may increasingly demand that the institutions facilitating their crypto trade, custody and payment provide better tax-relevant data sets.
All of this comes concurrent with the IRS’s continuing work to implement third-party tax information reporting regulations on virtual currency transactions, an item on the IRS priority guidance list. With this, the customer-side tax information demand may dovetail with the regulatory requirements that are expected in the coming months.
2. Pandemic relief Form 1099 waivers
In January, the IRS issued Notice 2021-06. The notice waives the requirement for payors and lenders to file information returns and payee statements within the Form 1099 series with respect to certain payments and debt forgiveness events arising under pandemic-relief legislation passed in 2020.
The waiver pertains to specified instances where nontaxable payments or cancellation of debt would be allowed under the pandemic-relief legislation.
Such instances include, for example, the forgiveness of Paycheck Protection Program (PPP) loans where no Form 1099-C would be required or loan payment subsidies under section 1112 of the CARES Act where no Form 1099-MISC would be required. These provisions principally affect banks and other lenders.
Notice 2021-06, however, states that no waiver is granted for situations where Form 1098 may need to be filed. For example, if a lender were paid mortgage interest under section 1112 of the CARES Act on behalf of a taxpayer, Form 1098 would still be required to be filed. This would be required irrespective of the general rule that Form 1098 generally does not apply to governmental payments.
3. Financial transactions tax redux
A financial transaction tax has been proposed in various forms in the past, especially by candidates during prior presidential campaigns.
In January, Representative Peter A. DeFazio of Oregon reintroduced financial transactions tax legislation.
His Wall Street Tax Act would apply a 0.1 percent tax on the sale of stocks, bonds, and certain derivatives, with the potential to raise $777 billion in revenue over a decade.
Given that there is a new administration in Washington with goals that may require offsetting tax revenue, discussions of a potential financial transactions tax in the U.S. are worth monitoring
Outside the U.S., financial transactions taxes are also of interest, with Spain reported to implement its own financial transactions tax effective January of this year.
4. IRS Office of Chief Counsel memo: offshore account information requests
A memorandum from the IRS Office of Chief Counsel, dated 3 December 2020 but released some weeks later, argued that the IRS has authority to request account information for U.S. individuals from certain non-U.S. financial institutions under the FATCA framework.
The memorandum, however, was limited to cases where the financial institution is located in a country that does not have a FATCA intergovernmental agreement (IGA) in place and where the financial institution has entered into a Foreign Financial Institution (FFI) Agreement with the IRS. The memorandum indicates that the IRS can directly request U.S. account holder information from these institutions.
The procedures would likely be different for financial institutions in IGA countries where the U.S. has negotiated special provisions with the respective local tax authorities on tax data collection and transmission.
5. Updated information reporting publications
In January, the IRS released updates to a couple of publications used for annual tax information reporting:
- Publication 1212 – Guide to Original Discount (OID) Instruments (revised January 2021)
- 2021 General Instructions for Certain Information Returns (Forms 1096, 1097, 1098, 1099, 3921, 3922, 5498, and W-2G)
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