Between the market debut of Coinbase, Tesla’s warm embrace of bitcoin, and even BNY Mellon getting into the digital-currency game, cryptocurrencies have taken huge leaps toward mainstream acceptance over the last several months. So it shouldn’t be any surprise that the U.S. government wants its cut.
The Internal Revenue Service added a question about cryptocurrency on 1040 tax forms for 2020, asking taxpayers if they’ve “received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency” during the past year. (Note: You don’t have to answer “yes” to that question if you only purchased cryptocurrency in 2020.)
Now, the agency is reminding taxpayers to make sure they answer the new cryptocurrency question correctly—otherwise, they could see a delay in their tax refunds. In an update Wednesday, the IRS listed a number of “common errors” that can cause such delays, including:
- Not reporting all of your taxable income
- Entering a name or Social Security number incorrectly
- Entering the wrong filing status
- Answering the “virtual currency” question incorrectly
- Mailing returns to the wrong address
- Entering bank accounts and routing numbers incorrectly
- Forgetting to sign or date the return
The IRS maintains that most refunds are received within 21 days if tax forms contain no errors and if the taxpayer uses direct deposit and files electronically. However, as many early filers learned this year, figuring out exactly what has caused a delay in your refund is not always easy. Sometimes, a return that is flagged for security reasons ends up in IRS limbo. The agency generally says it will contact taxpayers directly if it needs more information from them to process their returns, but that is cold comfort for people who were counting on getting their refunds quickly.
All of which is a way of saying, if you dabble in crypto, make sure you answer the crypto question correctly. According to federal law, digital currencies such as bitcoin and litecoin are considered property and therefore subject to capital gains tax. Whether or not you’ll owe taxes on them depends on a number of factors, which you can learn more about on the IRS’s FAQ page.