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15479: 1040 - Virtual Currencies - EF Message 2260


1040 Individual Data Entry

How do I report virtual currencies, such as Bitcoin, Litecoin, or Ethereum, on a return?

 

There are several possible entry points depending on how the currency was received, sold, purchased, etc. Per the IRS, "The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability." Some data entry possibilities in Drake Tax include the 8949 and/or D2 screens. 

According to the IRS FAQ on Virtual Currency Transactions, answer 42. "You must report most sales and other capital transactions and calculate capital gain or loss in accordance with IRS forms and instructions, including on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses."

The 2020 (draft) Instructions provide more detail on reporting:

"If, in 2020, you engaged in any transaction involving virtual currency, check the “Yes” box next to the question on virtual currency on page 1 of Form 1040 or 1040-SR. A transaction involving virtual currency includes:

  • The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or hard fork;
  • An exchange of virtual currency for goods or services;
  • A sale of virtual currency; and
  • An exchange of virtual currency for other property, including for another virtual currency.

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. If you disposed of any virtual currency that was held as a capital asset through a sale, exchange, or transfer, use Form 8949 to figure your capital gain or loss and report it on Schedule D (Form 1040).

If you received any virtual currency as compensation for services or disposed of any virtual currency that you held for sale to customers in a trade or business, you must report the income as you would report other income of the same type (for example, W-2 wages on Form 1040 or 1040-SR, line 1, or inventory or services from Schedule C on Schedule 1)."

Drake20

In Drake20, the Virtual Currency question has been moved to page 1 of Form 1040.

 

You can answer either Yes or No by checking the appropriate box near the bottom of federal screen 1

EF message 2260 generates preventing e-file until a selection is made.

Drake19 

In 2019, the IRS added a question to Form 1040, Schedule 1 regarding virtual currencies. Per the 1040 Instructions, "If, in 2019, you engaged in any transaction involving virtual currency, check the 'Yes' box next to the question on virtual currency at the top of Schedule 1." In Drake19, this question can be answered on screens 1 or B3. Note that you can only answer the question on screen 1 if both the foreign accounts and virtual currency questions should be "no." Otherwise, you must make the necessary entries on the B3 screen instead. 

Screen 1 checkbox if the answer to both questions is NO:  

Screen B3 must be used if the answer to either or both questions is YES. Note the three required entries, highlighted in blue: 

If Schedule 1 is produced on the return and no answer is given, EF Message 2260 is produced.  If Schedule 1 is not produced, Note 243 is generated in view mode if there is no answer given, however, this will not prevent e-file. 

Please see the following IRS resources for details, or contact the IRS directly for more guidance. 

 


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