Is anyone reporting crypto ownership on their tax returns?
Investor interest in cryptocurrencies surged in 2017 with some valuations reaching all-time record highs. Every single trade and purchase using cryptocurrencies is considered a taxable event by the Internal Revenue Service.
An estimated 7 percent of Americans own Bitcoin or some other cryptocurrency, and they are likely to owe taxes to the IRS on those investments, but so far, almost no one is paying taxes on them, Fortune reported.
So how many digital-asset traders are handing over money to the IRS?
Of the first 250,000 tax filings so far this year using credit-monitoring company Credit Karma’s tax-preparation service, less than 100 people reported owning any cryptocurrency, according to a survey. That translates to 0.04 percent of taxpayers who filed a Form 8949 for cryptocurrency gains and losses — a far cry from the estimated 7 percent who trade in crypto, the company said.
Credit Karma said 52 percent of its filers this tax season are millennials, and just 14 percent are at least age 55, CNBC reported.
While so few people have reported Bitcoin and other cryptocurrency gains or losses, we’re not surprised. Generally, Americans with more complex tax situations file later in the tax season, especially if they expect that they’ll owe money,” said Jagjit Chawla, a general manager in Credit Karma focused on taxes, MarketWatch reported. “However, given the popularity of bitcoin and cryptocurrencies in 2017, we’d expect more people to be reporting.”
Of the 250,000 people who filed taxes so far in 2018 using Credit Karma tax, just one person disclosed a crypto gain or loss big enough to be “significant,” according to Credit Karma.
Credit Karma Tax and research firm Qualtrics polled more than 2,000 American cryptocurrency owners in January. About 57 percent of respondents said they’d made money on their crypto investments—profits the IRS considers taxable. But 59 percent said they had never reported any gains to the IRS.
Credit Karma Tax started offering its online tax prep service for the first time in 2017, and 1 million people filed their tax returns that way. “That makes the service the nation’s fifth largest tax preparer, though Credit Karma expects to become the third largest this year, just behind TurboTax and H&R Block,” Fortune reported.
Bitcoin investors have a history of being evasive when it comes to paying taxes, Fortune reported. After only 802 people reported gains or losses from Bitcoin in 2015, the IRS in 2017 successfully sued the leading cryptocurrency exchange Coinbase for access to customer records.
Coinbase was court-ordered to identify more than 14,000 customer accounts to the IRS.
Mike Novogratz, a billionaire hedge fund manager who invests mainly in cryptocurrencies warned crypto traders to comply with IRS rules.
“When I talk to the blockchain community, I’m always pushing them—I’m like, ‘Dudes, pay your taxes.’ Because nobody in that space pays taxes,” Novogratz said at a conference in June. “Listen, the IRS is going to come after people. People are making real money now. So the IRS isn’t stupid.”
Taxes are due on Tuesday, April 17 — two days later than usual this year — and so far about 13 percent have filed tax returns. The IRS provides this filing guidance on its website for crypto traders.
The lack of cryptocurrency tax filings emphasizes how difficult it is to accurately report crypto gains and losses, said Brandon Williams in a CNBC interview. A former investment banker, he has been independently trading cryptocurrencies for several years.
He does more than two cryptocurrency trades a day, and uses an online service called CoinTracking to record those transactions for tax purposes. The volume and volatility of cryptocurrencies means it takes at least three or four hours every two weeks to note trading gains and losses, Williams said.
The IRS treats cryptocurrencies as property rather than a currency, CNBC reported. As a result, a transaction such as trading bitcoin for another digital coin is taxable since it is considered a sale of property for cash, which is then used to buy the other cryptocurrency. Income from creating bitcoin through the ‘mining’ process is also taxable, the IRS said.”