(Spoiler alert: tax information reporting for cryptocurrencies is just around the corner)

After some five years without guidance on crypto taxation, the IRS’s silence on the topic has broken. Following a deluge of “educational letters” directed at taxpayers reminding them that they need to report and pay tax on crypto transactions, the IRS, as we have noted, recently issued new guidance on the taxation of cryptocurrency transactions earlier this month consisting of 43 new FAQs and Rev. Rul. 2019-24.

But, as they say, when it rains, it pours. Following the new guidance, the IRS also issued a draft Schedule 1 to the individual 2019 Form 1040 tax return that included a new question (at the top of the page no less!): “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” According to the draft instructions to the form, the “Yes” box should be checked if the taxpayer “engaged in any transaction involving virtual currency.”

A virtual currency transaction per the instructions 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.

The IRS also stated that, if a taxpayer disposed of any virtual currency that was held as a capital asset, the taxpayer should use Form 8949 to figure capital gain or loss and report it on Schedule D (Form 1040 or 1040-SR).

For financial intermediaries, the crypto tax guidance that was issued in the form of FAQs and the revenue ruling (though providing clarification on the IRS’s position with respect to crypto hard forks and certain cost basis calculations) did not provide additional information on what, if any, information returns should be filed with respect to crypto. However, the IRS Priority Guidance Plan for 2019-2020 released on October 8, 2019 contains a new item: “Guidance regarding information reporting on virtual currency under §6045.” This is suggesting that the upcoming guidance for information reporting for crypto would involve reporting on Form 1099-B – Proceeds from Broker and Barter Exchange Transactions.

Last week, IRS Chief Counsel Michael Desmond is reported to have said that information reporting for crypto gross proceeds is the next focus of the IRS, as he reminded taxpayers and advisors that crypto information reporting is now on the coming year’s priority guidance plan. In the meantime, we understand that more crypto tax letters are said to be forthcoming and, in an IRS Office of Chief Counsel notice, we find out that the IRS is internally coordinating virtual currency exams. Crypto tax enforcement continues to heat up, and it may not be long before financial intermediaries are more directly roped into the effort.