“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? The IRS is now asking all taxpayers to disclose whether or not they had any interest in “virtual currency” but how does the IRS define “virtual currency?”
On its website, the IRS has removed two in-game virtual currencies, Roblox and V-bucks, from the list of examples of convertible virtual currencies that it had listed there just two months before. It also released a statement saying that transactions in those currencies do not need to be reported on a taxpayer’s tax return.
“Virtual currency” is a digital representation of value, other than real currency, that functions as a unit of account, a store of value, and a medium of exchange. (Notice 2014-21, Sec. 2, 2014-16 IRB)
“Convertible virtual currency” is virtual currency that has an equivalent value in real currency or acts as a substitute for real currency. (Notice 2014-21) The Notice specifically mentioned Bitcoin as a type of convertible virtual currency because it can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.
Taxpayers who in 2019 engaged in transactions involving virtual currency need to use Form 1040, Schedule 1, Additional Income and Adjustments to Income, to report the transactions and should review the Schedule 1 instructions for more information about how to report such transactions. A transaction involving virtual currency includes: the receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a 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.
In December, the IRS, on its Virtual Currency website mentioned Bitcoin, Ether, Roblox, and V-bucks as a few examples of a convertible virtual currency. But Roblox and V-bucks are “currencies” only in the sense they are used in the online games Roblox and Fortnite.
IRS Chief Counsel told reporters at a February 13 conference in Washington that it had been a “mistake” to list those ingame currencies as examples of a convertible virtual currency on its website.
In another statement, the IRS said that, “We have changed the language [of the site] 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.”
As a result, the IRS has revised the site and now it lists only Bitcoin as an example of a convertible virtual currency.