Uncovering assets is a common challenge in many valuation and forensics engagements, and the challenge becomes even greater when cryptocurrency is involved. True, the IRS now requires taxpayers to disclose their cryptocurrency dealings. In fact, it put a question right near the top of the Form 1040: “At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?” The plain language of this question would lead you to believe that, if a taxpayer owns cryptocurrency, he or she needs to answer “yes,” but that is not the case.
Through the cracks: During a recent BVR webinar, a question from the audience was: Is tax reporting triggered if someone merely buys and holds cryptocurrency? The answer is “no,” say the speakers, Katerina Gaebel and Mark DiMichael, both with Citrin Cooperman. They pointed out that the IRS specifically addresses this in its FAQs on virtual currency transactions, which states: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”
The bottom line is that you cannot completely rely on the Form 1040 to determine whether someone owns cryptocurrency. Nevertheless, tax forms do play an important role in uncovering cryptocurrency, but many more methodologies and tools need to be used. You can view a recording of the webinar, Cryptocurrency Fraud and Forensics: What Valuation Professionals Need to Know, if you click here (free to BVR Passport Pro holders).
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