When the Taxman Comes Knocking, Will Americans Report Crypto Gains?

Cryptocurrency investors appear to be skirting their taxes. Whether keeping with crypto’s anti-establishment roots or for lack of ability, American cryptocurrency practitioners are testing the IRS’s tolerance for crypto tax evasion.

Tax day in the United States is tomorrow, April 17, 2018, but according to the popular tax filing service Credit Karma, few cryptocurrency holders have reported earnings or losses on their 2017 tax documents. Out of the company’s 250,000 new filings, under 100 have disclosed capital gains from cryptocurrency investments, figures that are in line with the company’s former reports on cryptocurrency tax documentation.

Certainly, Credit Karma’s user base does not constitute the whole of America’s crypto investor populace. But it could reflect the demographic’s general resistance to paying taxes on their investments, and this could have something to do with the IRS’s policy.

In 2014, the IRS released an official notice regarding its cryptocurrency tax policy. First and foremost, the IRS treats virtual currencies as property, subjecting them to the same capital gains taxes that affect traditional investments like stocks, bonds and real estate. These taxes are applicable to anyone who has received payment for goods and/or services in crypto (as part of a salary, for instance), as well as miners, who must account for gains as part of their income.

The tax code appears straightforward enough, but uncertainty remains. Given that the IRS treats any trade as a taxable event and the onus of reporting rests on the investor, reporting on cryptocurrency investments can seem confusing and convoluted to those untrained in accounting and finance.

“Even with the tax deadline rapidly approaching in the U.S., we’re still seeing lots of people unsure about the proper way to prepare cryptocurrency taxes. Properly accounting for crypto-to-crypto trades, trading on multiple exchanges, and purchases made with cryptocurrency can be an overwhelming task,” Chris Kovalik, founder of Cointaxes, told Bitcoin Magazine.

Kovalik finds that the IRS’s policy places “the burden … on the taxpayer to follow and account for the government’s guidance when filing taxes.” Unlike other tax codes that offer standards and historical precedent, crypto investors have no touchstone for guidance.

According to the Los Angeles Times, the IRS has suggested that taxpayers review “factual scenarios that most closely resemble their circumstances” to seek such guidance, something David Klasing, a tax and accountant lawyer, told the Times amounts to “basically just telling practitioners to take a wild-ass guess.”

And this guess could look to answer questions that stem from a variety of scenarios. Along with crypto-to-crypto trades, “[many] people may simply not know that the IRS has stated that spending crypto is a taxable event, akin to a barter transaction,” Jon Brose, an attorney for Seward & Kissel’s Blockchain and Cryptocurrency Group, told Bitcoin Magazine. This means that day-to-day purchases with bitcoin and other currencies are subject to capital gains taxes.

As the market matures, there are gray areas still. For example, the advent of airdrops and hard forks for cryptocurrency dispersal means investors will likely have to wrestle with reporting these earnings in their income, as well.

As we look down the barrel of America’s first cryptocurrency tax season, early adopters and veteran enthusiasts will likely bear the taxman’s heaviest brunt, as they likely have years of previously unreported gains to follow up on. Depending on the size of their stash, these individuals could be some of the 13,000 users Coinbase was legally obligated to report to the IRS back in February.

These account records are likely to belong to those who have realized great profits from their original investments, not your run-of-the-mill investor. Brose believes that the average investor probably doesn’t think to report gains since “the practical problem of tracking which cryptos you have spent or sold” becomes too much of a hassle for reporting a modest portfolio. He also finds that “individuals that are spending crypto frequently on relatively small items may think that it doesn’t make a lot of sense to declare a taxable event every time they buy a cup of coffee.”

Given that formal guidance is nebulous and the IRS’s ability to enforce their policy is yet to be seen, cryptocurrency investors may be inclined to take calculated risks that have become commonplace in such a volatile market.  

But if the IRS wants investors to work with them in the future, things will have to change, Brose argues.  

“To ensure greater compliance, the IRS ought to make rules for cryptocurrencies that conform to the way crypto actually works and is used, so that taxpayers can accurately compute their tax liabilities arising from crypto transactions.”

Until that time, investors must either navigate their filing themselves, seek help from an accountant or taxation service, or hope their portfolios will fly under the IRS’s radar.