Failing to cash out during the crypto craze of late-2017 is something that many of us have been guilty of. With prices looking like they had no intention of stopping, those in receipt of major gains were reluctant to go against the tide. Unfortunately, yet another example of this grave mistake emerged recently, in the form of a Californian-based student who received a remarkably large tax bill in the region of $400,000 — a total far outpacing his realized gains.
The story, discussed by the trader himself on Reddit, begins in mid-2017, when the novice decided to deposit $5,000 in to a newly created Coinbase account. Upon building up his exposure to a selection of altcoins, the trader very quickly increased the value of his investment. In fact, the student, who goes by the Reddit username “u/throwaway283921”, explains that towards the end of December 2017, his original $5,000 portfolio was worth close to $1 million. As many would agree, an excellent return on his initial investment!
Nevertheless, we all know how the remainder of the story goes, at least in terms of the sudden bear market that quickly followed. With Bitcoin peaking at $20,000, investor sentiment very quickly changed in early 2018. With the trader failing to cash out his significant gains, his $1 million portfolio soon reduced in size, subsequently claiming in his Reddit post that it is currently worth around $125,000. Although a substantial decline from its peak, that amounts to a sizeable increase of almost 2,400%.
However, what the newbie trader didn’t realize at the time of his decision to “HODL” was that his 2017 profits were liable for taxation with the U.S. authorities. As per official guidance supplied by the Internal Revenue Service (IRS), virtual currencies are treated as property and as such, gains must be reported, and are taxable once they are realized.
Nowhere to turn
In accordance with the IRS’s stance on cryptocurrency gains, the student received a tax bill amounting to a remarkable $400,000. Even though the trader never traded into fiat currency, he made numerous crypto-to-crypto trades (i.e. Ethereum to Litecoin) that yielded sizeable gains, and those qualify as taxable events. In the eyes of the law, the trader had realized gains close $1 million towards the end on 2017, based on an initial investment of just $5,000, even though he never traded any of it into cash. As a result, the tax bill is now more than three times the current value of his portfolio.
With no way to pay the bill, “u/throwaway283921” decided to hit the Reddit forums and seek advice on the matter. While some members of the community were somewhat harsh, most suggested contacting a qualified tax specialist.
This particular conundrum is not the first time unsuspecting cryptocurrency traders have been hit with a tax liability, and it certainly won’t be the last. However, the fundamental issue is that it is no easy feat to assess the amount of ongoing gains and losses, especially when one considers the highly volatile nature of the industry. Moreover, whilst the Californian-based student, who now claims to working as a retail assistant for $12/hour, did experience a rather fortunate period when his investments skyrocketed, the fact that he did not cash out his profits seems somewhat unfair.
This should be a lesson to all that taxing cryptocurrency profits is something that many jurisdictions are looking to install a framework for, if they haven’t already. Always speak to a qualified advisor if you are unsure!