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Monday, February 14, 2022

1040 Virtual Currency Confusion from Two Years Ago Is Still Confusing

Happy Valentine's Day!

Just posting a reminder today of an IRS website added two years ago on February 14, 2020 about virtual currency.  Here is the link and here is the entire text:

"The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return."

Prior to this 2020 post, the IRS website on virtual currency stated (thanks to the Wayback Machine for the information!):

"Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency."

Today (since 2/14/20), that website reads:

"Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency."

I think the website post of 2/14/20 added to the confusion because convertible virtual currency per the IRS is "a digital representation of value that functions as a medium of exchange, a unit of account, and /or a store of value. They refer to "convertible virtual currency" as something that acts as a substitute for real currency.

V-Bucks and Robux are obtained with US dollars and can be converted back. They arguably act as real currency because they are needed in order to play these online games. So, why did the IRS remove them from the virtual currency website and imply that they are not virtual currency?  Not clear.

And, the 1040 instructions (page 17) on the virtual currency question* also raise issues with the 2/14/20 website because they (as well as IRS FAQ 1) states:

"Regardless 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."

Query: How can that gaming currency not meet this broad definition of virtual currency?

I think the likelihood of tax consequences of obtaining, using and converting most gaming currency back to US dollars yields no accession to wealth (income) so has no tax consequences (the gaming currency seems to be more of a stablecoin with a set value in USD). But, that is not part of the 1040 virtual currency question. It is enough to dispose of the currency (convert it back to US dollars) that seems to warrant a "yes" answer to the question.  The instructions do state that if all a person did was acquire virtual currency, they can check "no", but disposing of it warrants a "yes."

One more observation: When the 2/14/20 virtual currency item was posted by the IRS, they already had a website of FAQs. Why wasn't that added as an FAQ? Why set it out on an isolated website where few will ever find it?

What do you think?  

*The 1040 virtual currency question for 2021 is: At anytime during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?  

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