As tax season is nearing, Internal Revenue Service (IRS) wanted to have share with billions of profit of cryptocurrency.
A lot of last year’s winners in these growing industry are in deep porridge now.
Because the agency is about to collect the tax owe by crypto traders on 2017 profits.
They’re losing money now, so it’s not easy to come up with the cash to pay off the IRS. As for using today’s losses to offset last year’s gains, these tax naïfs are discovering, too late, that capital loss carryovers run forward but not backward, says Forbes article.
According to the report of Forbes, Suppose speculator Bob turned $200,000 into $1 million in last year’s feverish market, trading all the way—in and out of Bitcoin and Ethereum and Ripple and back in again. Now Bob has $800,000 in short-term capital gain to report on Schedule D. The state and federal tax bill is going to be upwards of $300,000.
The 2018 crash has shrunk Bob’s account value, let us suppose, to $300,000. If Bob sells out to pay the tax, he will have a $700,000 capital loss to claim. But he can claim the loss only against future capital gains, not past ones.
Small consolation: Bob can use the $700,000 against up to $3,000 a year of ordinary income. If he throws in the towel on cryptocurrencies and goes back to his day job delivering pizzas, it will take him 234 years to catch even.
Tyson Cross, an attorney in Reno, Nevada (and a Forbes.com contributor) who has built up a specialty in crypto taxation, has been hearing many a sad tale recently. “Some alt coins are down to a tenth or less of their peak value,” he says. “The taxpayers are distraught. They don’t have any way to pay [the tax bill]. There’s only so much we can do.”
Quite apart from the dollars owed, dealing with the paperwork can be quite a burden. Some investors have bots placing trades all day long, and a single buy or sell might be executed at an exchange via multiple transactions of fractional coins. Cross is working on one tax return with 1.4 million trades.
If they use an algorithm to place the orders, investors may even be unaware of how much they are trading. One CoinTracker client signed up for the firm’s low-budget service that allows a maximum of 100 transactions. He provided links to his exchange accounts, and then got a surprise. Turns out he has 200,000 entries to put on his 1040.
Section 1031 of the tax code permits a deferral of tax when one investment property is swapped for another of a similar sort. It works when you exchange one plot of land for another. What about Bitcoin for Ethereum?
For 2018 and later tax years, the law is clear: No tax-deferred exchanges on anything but real estate. For 2017, the law is murky. If the like-kind deferral proves to be valid for digital coins, and if our hypothetical Bob traded in a way to make his trades into exchanges rather than sales, he would have no $800,000 gain for 2017.
Instead, he would report a sale in 2018, assuming he closes out today’s positions. If the market doesn’t move further, he’d owe tax on only $100,000 ($300,000 current value less $200,000 starting point).
The article written by William Baldwin, Forbes contributor writer, the Section 1031 is of no help to someone who sells one kind of coin for cash and then uses the cash to buy a second kind of coin.
Baldwin said “play the coin lottery. Some taxpayers, Cross predicts, will file a correct tax return but omit a check to the IRS. They’re hoping to sell their coins after a rebound. Of course, if the market stays weak—Bitcoin is now struggling to stay above $7,000—they will be in worse shape.”
He added that “if you file an honest return but don’t pay, you owe principal plus interest plus a late payment penalty of 0.5% per month.”
Meanwhile, what if your trading is on Binance, the offshore site? If your account is worth at least $10,000, you are obliged to tell the government about it in an FBAR filing. You were planning to omit that form, too? Then understatement penalties may be the least of your worries. Prepare for a visit to the penitentiary.