First confusion comes from the fact that IRS is lumping the word ‘virtual currency’ to mean everything – cryptocurrencies and in-game currencies.
According to CNN, the IRS has now quietly deleted the provisions about taxes on Fortnite’s V-Bucks, which required real dollars to purchase in the game.
V-Bucks actually represents monetary value that is much more real than most cryptocurrencies which may not even have any exchange listing. In spite of the absence of market value, IRS has required these cryptocurrencies to be reported on the tax returns.
However, this sudden deletion of guidance on Fortnite’s V-Bucks is raising questions on what ultimately will be regarded as reportable and taxable for US tax purposes.
“Including in-game virtual currency was an error”
According to Bloomberg, Michael Desmond, IRS Chief Counsel, said “It was corrected and that was done quickly—as soon as it was brought to our attention,” at a Tax Council Policy Institute conference in Washington, talking about inclusion of in-game virtual currency within the purview of taxes.
CNN reported “Following the IRS’s surgical edits this week, bitcoin is the only remaining example of a virtual currency offered on the agency webpage. But just because V-bucks have been removed does not mean the IRS regards all transactions in the currency as tax-exempt.”
Cryptocurrency distinguished from virtual currency
IRS website distinguishes between cryptocurrency and virtual currency in its FAQ.
According to the FAQ, “Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, and a medium of exchange. Some virtual currencies are convertible, which means that they have an equivalent value in real currency or act as a substitute for real currency. The IRS uses the term “virtual currency” in these FAQs to describe the various types of convertible virtual currency that are used as a medium of exchange, such as digital currency and cryptocurrency. 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.
Cryptocurrency is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. A transaction involving cryptocurrency that is recorded on a distributed ledger is referred to as an “on-chain” transaction; a transaction that is not recorded on the distributed ledger is referred to as an “off-chain” transaction.”
In this sense, virtual currency is much broader and includes cryptocurrency.
How do you answer the question about virtual currency in 1040?
In our opinion, even if you never touched cryptocurrencies and have only dealt with the in-game virtual currency, you will have to answer the question: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” – ‘YES’, because in-game virtual currency meets the definition of virtual currency.
Even after answering Yes to that question, if all you have ever touched is in-game virtual currency – then you may not have any additional filings or reporting because in-game virtual currency has been specifically exempt by IRS now, in our opinion.
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