Wesley Snipes did it and ended up in federal prison. So did Ja Rule and many other celebrities who thought they could dodge the IRS. While these individuals may have suffered at the hands of fiat taxes, the same could happen to those of us who make money from crypto investments.

Take this student for example. Back in May 2017, the crypto enthusiast invested the small sum of $5000 in Ethereum (ETH) when the asset was worth a mere $50.

As we remember, within months of this, the digital currency saw an immense increase from $50 to $1,281 at it’s highest peak as the crypto market reached its valuation of $800 billion.

This meant that the student had received a 25-fold return on his investment and has made a whopping $125 000 in ETH, he decided to invest a couple of other digital assets and ICO’s (Initial Coin Offerings) and by last year December, his portfolio reached an amazing $880 000.

“I gambled in more than a few bad ICOs to start 2018, had some money in coins that absolutely plummeted with no chance of recovering, etc. Today my portfolio sits at $125k, a far cry from my $880k. My estimated tax liability for 2017 is about $400,000,” said the student.

At the peak of the crypto market, this student scored a massive net profit of $875 000 with a measly investment of $5000. Amazing right? Well, what happened next, will shock you.

Tax Liability X Cryptocurrencies

In the USA, crypto investors are required to declare all taxes using a tax form numbered 1099-K & major exchanges such as Coinbase actually have integrated tax filing systems in place in order to streamline and automate the process of filing for investors.

Earlier this year, in March, following the spending of over a $1 million in January in a dispute with the IRS (Internal Revenue System), Coinbase announced new tools in order to assist users with a comprehensive view of trading activity, calculation on gains and of course a tax filing system.

“Gains on digital currency sales and exchanges are taxable in the US. For reference, here are the IRS guidelines for reporting digital asset gains. We understand taxes for digital currency can be complicated, so we updated our tax tools to make reporting easier,” said the Coinbase team at the time.

Back last year in early 2018, Coinbase reported the 1099-K form of the student which took into calculation each and every gain that he made during the year. It must be noted though, that while he made no withdrawal of funds, crypto to crypto trades were listed on the report.

“These were crypto-to-crypto trades (i.e. Bitcoin for Ethereum, Ethereum for Litecoin). These are considered taxable events from what I understand. At no point did I ever cash out to fiat and transfer any USD into my bank accounts from these tradings.” said the student.

The issue being here of course, in the US if tax reports are not filed with the IRS, failure to file and failure to pay can incur penalties.

“I’ve scheduled a consultation with a tax attorney that specializes in cryptocurrency and alternative investments. I appreciate it all very much, these last few months have been mentally trying.” said the student.

The Clarification Of Crypto Tax:

Due to the nature of cryptocurrencies being an asset class in early stages of development, the taxation policies surrounding them are of course ambiguous in many regions including the US where they remain to be of a complex nature.

Coinbase and other exchanges and crypto companies might make it easier for investors to process but unexpected situations could arise which ultimately could complicate the tax return processes for crypto investors.

Have you experienced any issues with the tax man & your crypto investments? Let us know about your experiences.

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