Bitcoin HODLers do not have to disclose their holdings to IRS after all

The US Internal Revenue Service explained how to answer a question about the cryptocurrency holdings, placed on the front page of the standard 1040 form. According to the instructions published by the authority, the cryptocurrency users that only hold digital assets and transfer them among their own wallets do not have to answer YES to the following question:

At any time during 2020, did you sell, receive, send, exchange, or otherwise acquire any financial interest in any virtual currency? 

The IRS explained that it's focused on those users that have been engaged in trading cryptocurrency or sending and receiving cryptos from other people. 

A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control, the newly released draft instructions say. 

The cryptocurrency community welcomed the explanation as it was not clear if a taxpayer should disclose the possession of the cryptocurrency if only holding it without making any transactions. Also, the privacy-conscious traders were relieved to know that there's no need to admit having digital coins. 

Forked tokens are also covered

Apart from that, the IRS included tokens created during hardforks in the list of the taxable assets. At the time of writing, the taxpayers are obliged to report on the cryptocurrencies obtained:

• As a part of hardfork.
• As a payment for goods and services.
• From disposal.
• In exchange for other coins.
• Via airdrop.

A loophole in the law?

The users do not have to declare coins they moved among their own wallets. However, some experts note that this language is still confusing and the law can be easily abused. As wallets are supposed to be anonymous, users can always send coins to someone else and claim that was their wallet. 

According to Shehan Chandrasekera, the Head of the Tax Strategy at CoinTracker, US citizens are expected to provide correct information and may face trouble if the audit reveals mistakes. In the interview to Decrypt, he said:

 The US has a voluntary tax system. You are expected to report income correctly by default. If you are audited, then you'll have to substantiate.  

Meanwhile, the US tax authorities are moving in lockstep with the rest of the world, as many countries recently tightened their cryptocurrency-related tax regime. For example, Russia proposed to throw people behind bars for five years if they fail to declare their cryptocurrency wallets or crypto mining proceeds.