The first thing we will see after entering a taxpayer's name and address on the 2020 1040 U.S. Individual Income Tax Return form is a question that requires us to attest yes, or no as to our involvement with any virtual currency. While the definition of virtual suggests that the currency is not physically real, the IRS now considers virtual or "crypto" currency as an asset. That asset can be exchanged for other assets, used as payment for services or even gifted. So by asking the question, the IRS is now working to make sure income, gains and losses from transactions using virtual currency are reported to them. Virtual currency exchanges are already required to report transactions to the IRS after a certain value threshold has been reached
As I become familiar with cryptocurrency transactions, it appears to me the most difficult task (other than paying tax on any income or gains resulting from the transactions) will be to determine exactly what the value of the income, gain or loss is in US dollars. Accounting firms are now equipping themselves with software programs that can calculate digital currency gains and losses. However, the result is only as good as the data entered into the software. For this reason, when you are ready to start using cryptocurrency be prepared to keep good records. Similar to stock investments, real estate assets and business income records, the first questions your accountant will ask you is when did you get it and how much did you pay for it.
It's important to answer the IRS's inquiry honestly. And even more important to realize crypocurrency is real, is not hidden and needs to be reported as transactions of these types become more and more mainstream.