Did you sell Bitcoin to diversify into Altcoins? If the answer is yes, please pay attention: You may be royally screwed.
According to the Internal Revenue Service, anything purchased using a digital currency is liable to be taxed as a capital gain.
Do you have records when you bought and sold?
Sold includes trading Bitcoin for Altcoins or vice versa.
Both have huge Tax Consequences and fines.
What, Me Worry?
If you did anything like this: I just discovered that I owe the IRS $50k that I don't have, because I traded in cryptos, you are in serious financial trouble.
I make $47k a year at my job as an office assistant.
At the advice of my friends, I took most of my savings and bought 8 bitcoins back in early 2017 for about $7200. You can imagine how I felt when it went up. Around December 2017, I got caught up in the altcoins frenzy and sold most of my bitcoins (about $120k 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 $50k if I add up state (California) and federal. But with the crash that happened recently, I added up my altcoins and I only have like $30k worth. I only have about $5k in other savings.
How do I pay this? Do I have to sell my altcoins, and give them what I can? Or is there some workaround?
The biggest problem is having a huge tax liability in one year, without paying the taxes, with the losses happening in another tax year.
Oops. He owes $50,000 on coins worth $30,000.
Losses in 2018 can only be offset by gains in 2018. He has deferred losses ($120,000 minus $30,000) at the moment, but that cannot be used to offset his realized gain in 2017.
California Makes Matters Worse
Here is a pertinent comment: "In California, the Franchise Tax Board does not f*ck around and they have zero patience. The FTP put liens on me, froze my bank account, etc. The CPA who helped me get started said the IRS is way more patient than the FTB — the FTB will ruin your world for pennies, pay them."
Consult a tax accountant immediately.
The $90,000 loss can be rolled over, but only offsetting $3,000 worth of income, per year, going forward.
It is a huge gamble to not bail on the trade and work out a plan to cover the immediate shortcoming of a $20,000 loss.
Altcoins worth $30,000 today may easily be worth $15,000 or less next week.
It is difficult to say how many others are in similar positions, but pressure on Altcoins could be immense.
Back Taxes, Interest, Penalties
Last November, a US district court judge in California ordered Coinbase, a popular platform for trading bitcoin, to turn over identifying information on accounts worth at least $20,000 during 2013 to 2015.
The court case arose after the IRS found that for in each year from 2013 to 2015, only about 800 taxpayers claimed bitcoin gains. During that time, the cryptocurrency rose to $430 from about $13.
The order, which affects about 10,000 accounts, is a narrowing of an earlier effort by the IRS. In a blog on the Coinbase website, the company notes that the first request would have impacted another 480,000 accounts.
It will not stop with 10,000 accounts. The opening will undoubtedly discover tax evasion, then the the IRS will go back for all of the accounts.
No Statute of Limitations
Those who fail to file and pay taxes on huge gains will likely be discovered at some point.
There is no statute of limitations on tax evasion or fraud.
The onus is on investors to report gains to the IRS. Don't expect a 1099 for your trading.
The IRS may offer to wave interest and penalties to anyone who voluntarily steps forward.
Such a setup could spring a perfect trap.
All the IRS has to do is find a dozen proven evasions, offer a voluntary program for say three months, then aggressively go after some big gainers who failed to report.
More Selling Coming
The Tax Man Cometh. This necessitates more selling from anyone who traded, flipped, or made purchases with any coins.