Crypto fortunes can be taxed – Student faces $400K tax bill

An old adage states that the only certainties in life are death and taxes, but before you take the former path, you might want to learn a bit about how cryptocurrency gains in your own jurisdiction are taxed under local law. It is not a simple topic, especially in the United States where tax authorities are unclear as to whether a gain is an ordinary income or subject to capital gains taxes, as might apply to an investment in an equity security. Some global jurisdictions ignore investment gains altogether, but it is best to know the answers beforehand, not after the fact. One anonymous student has now learned that he may be facing a $400,000 tax bill with no means to pay his tax liability.

This unfortunate story is by no means a new one. The same trap can occur to anyone that is unsure of the proper way to handle stock options that are awarded by your employer or when any large gain occurs in one tax year, followed by sizable losses in the next. In this case, the student invested $5,000 in Ethereum in 2017 and reaped a whirlwind as the price soared. He quickly traded his way into having an $880,000 portfolio by the end of December in 2017. As luck would have it, he never thought to ask anyone if he might have a tax liability, after recognizing enormous gains throughout the year.

The student’s response to his plight was that, “They really never do teach this stuff.” As he may be told by a tax professional, ignorance of the law is no excuse. If his portfolio were still intact, then he could liquidate as appropriate and pay the tax authorities, but the story goes down hill fast in 2018. The crypto asset bubble burst, destroying the value of many of his new positions, while his luck with ICOs went from bad to worse. He now has a portfolio valued at $125K, but the losses are now in the following year. Yes, he might be able to carry back losses to get a refund from a prior year, but he never paid those taxes.

The student also carelessly asked for advice on social media, when he should be seeking a tax professional to negotiate a potential deal with the Internal Revenue Service, if at all possible. The problem, however, may be in the definition of his gains and losses. Different rules apply to professional traders, and currencies typically, like lottery tickets, are not considered investments under the law. Trying to use tricky “accounting methods” or other ruses would be a waste of time. In fact, time is working against this student, since penalties and interest may also be applied later.

The lesson is simple. Before venturing into the world of cryptocurrencies with the intent of booking enormous gains, it would be wise to check with a local tax professional to learn the best way to minimize your tax exposures going forward. Consider the cost as an investment in your future. It is better to be safe, than sorry, as this student soon discovered.