Are Taxpayers Properly Reporting Cryptocurrency Capital Gains?
Just like with more traditional investments, the Internal Revenue Service (IRS) considers profits made from buying and selling cryptocurrencies to be capital gains. Thus these transactions should be reported on your tax returns. However it seems very few crypto buyers are actually going through the trouble.
According to The Motley Fool a mere 800 to 900 taxpayers reported their cryptocurrency capital gains to the IRS between 2013 and 2015. Meanwhile Coinbase data shows that more than 14,000 people traded upwards of $20,000 worth of coins in that time. Notably this doesn’t mean that all 14,000 of these individuals actually made money on their transactions, but these figures are enough to raise a few eyebrows.
Also notable is that the cryptocurrency market has exploded since 2015. While it’s hard to pinpoint how many taxpayers have participated in crypto exchanges, one interesting data point comes from Credit Karma’s tax service. Of the quarter of a million users who have filed their returns on the platform so far, only 100 users have reported crypto transactions — that works out to .04%. Compare that figure to the 57% of respondents who said they saw cryptocurrency gains as part of a study by Qualtrics last month. Of course, to be fair, not only do individuals have nearly two full months to file their taxes but those with more complicated tax situations — like reporting capital gains — are also less likely to be utilizing a free filing option like Credit Karma.
Although some of these discrepancies can be explained, the IRS and Congress are now trying to crack down on those evading their crypto tax obligations. In fact the Coinbase data referenced above was released as a result of a lawsuit the IRS filed against the crypto exchange. Additionally the recently-passed GOP tax bill made some slight language changes that could make it more difficult to excuse skipping crypto gains. As Motley Fool explains, “The passage of the Tax Cuts and Jobs Act in December killed a long-standing cryptocurrency tax loophole known as the like-kind exchange, as of January 1. Before that date, cryptocurrency investors could exchange their bitcoin, Ether, Litecoin, or other virtual tokens for other virtual tokens without paying capital gains tax. They were making what was considered a ‘like-kind exchange.’ However, the new tax code replaced the word ‘property’ with the phrase ‘real property,’ meaning any exchange of one digital currency for another would count as a capital gain or loss, and it would have to be reported.”
On top of recent setbacks like the reclassification of crypto purchases among banks and the continued volatility in price, increased scrutiny by the IRS in regards to cryptocurrency transactions are just another worry investors can add to their list. Ironically, while this crackdown is in progress on the federal level, a bill in the Arizona legislature would allow residents to pay their state tax bill in Bitcoin. In other words, prepare yourself for a cryptocurrency regulation showdown that will surely be gearing up in many sectors of the U.S. government.