- Cryptocurrency exchanges generally don’t send customers information about potential tax liabilities.
- With the deadline for filing taxes Tuesday, many cryptocurrency investors are freaking out about what they owe the IRS for their holdings
The bitcoin boom of 2017 minted several new millionaires – but not everyone who jumped on the bandwagon is currently enjoying their spoils.
With the deadline for filing federal taxes in the US on Tuesday, cryptocurrency investors who cashed in last year may face a massive tax bill from the IRS.
Investors are required to pay taxes on their cryptocurrency investments if they sold their digital-coin holdings at a higher price than they bought them. But since many cryptocurrency exchanges don’t send customers tax documents, many may not even know they have to pay taxes on their coins – or how much.
Perry Woodin, the founder of Node40, a blockchain accounting company recently acquired by HashChain, told Business Insider this was a problem affecting many investors.
“Millions of people have a tax liability they don’t realise or know how to get the numbers for,” Woodin said.
One investor shared their story in a Reddit post that went viral:
“Around December 2017, I got caught up in the altcoins frenzy and sold most of my bitcoins (about $US120k worth) to buy a bunch of different coins. I didn’t know this back then but it looks like I owe income taxes on those trades, which adds up to about $US50k if I add up state (California) and federal.”
The problem is that the coins the investor swapped their bitcoin for are now worth only about $US30,000. And this person says they have only an additional $US5,000 in savings.
“I feel like I might have accidentally ruined my life because I didn’t know about the taxes,” the investor concluded.
Woodin told Business Insider he knew a couple who faced a similar situation.
“In this case, they bought Dash real cheap at $US7, and then it went to $US1,600,” Woodin said. “They cashed out to do $US100,000 worth of home renovations and didn’t have enough to pay the tax.”
At first glance, it might seem easy to chalk up these anecdotes as irresponsible behaviour. But there are some good reasons people are confused.
For the most part, cryptocurrency exchanges do not send customers tax forms, such as a 1099-DIV, which informs investors how much they made from selling investments during the year. The exchange Coinbase does send this tax information, but only if you have more than $US20,000 invested with the company.
Without a 1099-DIV, it’s up to the investor to figure out how much they made from selling cryptocurrencies during the year and how much they will owe in taxes.
The tax rate depends on how long the cryptocurrency was held. If it was less than one year, the investment profit is taxed just like a salary. If it was longer than one year, capital gains tax rates apply – they’re typically lower but can be as high as 20%.
So what are you to do if you are a crypto investor in a tax-related bind? According to Gwen Moore, a partner at the tax consultancy Johnson Moore, the bottom line is to reach out to the IRS.
“If they have a huge tax bill they can’t afford, then they can get into a payment plan,” she said. “There are certain programs people can get in to settle with the IRS for taxes if they can’t pay.”
The IRS offers payment plans at much lower interest rates than a person would have if, for example, they tried to pay an unaffordable tax bill with a credit card. The current interest rate is 4%, not including any additional penalties.
The one thing you don’t want to do is ignore the bill.
For folks who started on their taxes and want to figure out how much they might owe, Coinbase recently launched a tax calculator.
“People can take action to find out what their cost basis is, what the potential gain or loss would be,” Moore said.
If you filed without mentioning your cryptocurrency investments, it’s OK, Moore says, as long as you notify the IRS and explain your situation.
“They have a lot of discretion to distinguish between people who made a mistake and someone who is evading taxes,” she said. “Obviously, there is a difference between someone who comes forward and explains their mistake, and someone who looks like they heard about the crackdown and moved their crypto somewhere else.”
Lauren Lyons Cole contributed reporting.
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