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2019 Tax Deadline: File Your Bitcoin Tax Return – or Else

Last Updated March 4, 2021 2:44 PM
Marvin Dumont
Last Updated March 4, 2021 2:44 PM

It’s tax season, so sharpen your pencils for the annual ritual of labyrinthian-maze running through the IRS’s nearly 1,000 forms.

“Nothing can be said to be certain, except death and taxes,” said Benjamin Franklin.

But one thing is certain: The Internal Revenue Service is worse than death. Call it paper-boarding — call it a crime against human sanity.

Tax Deadline Waits for No Bitcoin Investor

The tax code forces you to decode more than 10 million words – 12 times longer than the Bible. In this jargon-filled obstacle course, you’ll find phrases such as “exemption to the exemption to the exemption.” I have a masters degree in accounting, and I still can’t figure it out.

Unfortunately, the government criminalizes you for not accurately complying with exceedingly complex regulations that the IRS’s own employees and so-called experts don’t understand and/or can’t clearly explain and/or can’t agree on. The bureaucrat-wasteland that Washington has become would be unrecognizable to America’s Founding Fathers.

What’s discouraging is that lobbyists bribe politicians whose staff quietly write loopholes into the tax code (of which there are 50,589 restrictions ) that result in companies like Amazon (ranked no. 8 in Fortune 100) paying zero federal taxes  despite earning $11.2 billion in profits last year.

Crypto Tax Preparation: The Antithesis of Decentralization

Crypto investors must possess extremely detailed records of all purchases, sales, trades, and exchanges — including “fork” income and airdrops (of which law and guidance are lacking) — that occurred last year, Pat Larsen, CEO of crypto-tax software ZenLedger, tells CCN.com.

“Cryptocurrency is one of the most complicated areas of tax law. Users must track their activities for tax purposes, therefore it helps to have accurate documentation of your token portfolio.”

In an April 3 webinar , Larsen was joined by Andrew Gordon, a certified public accountant (CPA) and tax attorney who specializes in cryptocurrencies. The gentlemen identified common scenarios that are taxable. These include:

  • Sale of crypto to fiat
  • Sale of crypto for another crypto
  • Exchange of crypto for an item or service (capital gains )
  • Mining (ordinary income and capital gains)
  • Fork income and airdrops
  • Crypto-denominated compensation

However, the following are non-taxable events: the purchase of crypto with fiat; transferring coins between wallets; and gifting up to $10,000 equivalent per recipient. Users can also gain tax benefits when funding tax-favored IRA accounts.

If you track your portfolio using CryptoCompare or LiveCoinWatch, that’s a good start.

Cryptocurrencies Aren’t Viewed as Currency

Cryptos are treated as intangible property  (IRS Notice 2014-21) which means they’re considered more like stock than currency. Coins are also subject to wash-sale rules  which prohibit certain deductions of losses (in cases where a taxpayer is attempting to game the system).

“Your coins have short- and long-term capital gains and losses, and these are reported on Form 8949  [Sales of … Capital Assets], Schedule D, as well as, Line 13 of your Form 1040 ,” says Pat Larsen.

He tells CCN.com what info to gather. First, crypto users must know the date and price of purchase, quantity of coins, and date and price of the sale to calculate gains (or losses). The cost basis is the price of token when acquired. Transaction fees can be deducted.

“The government indirectly wants you to sell cryptos in order to pay taxes. Let’s say you profit $20,000 from trading Ethereum to Bitcoin. Even though all your gains are now in BTC, the IRS. wants its share of the $20,000 gain. But it wants the tax payment in dollars.”

So you owe taxes on crypto gains (assuming these aren’t canceled out by losses). The feds don’t care that you may not possess cash to make a payment. Therefore, you’d probably have to sell some coins to settle your tax bill.

Bitcoin Tax Reporting Is a Ridiculously Laborious Undertaking

Here’s a reality check: The crypto ecosystem, with its ideals of decentralization and liberty, falls under the purview of the bureaucrat-lobbyist-politician industrial complex. Where a faceless (and often unethical ) bureaucrat says: “Just hire a CPA or tax attorney” whose billing rates  for junior professionals can exceed $100 an hour.

But that’s very expensive.

American spend 54 hours  on average telling the government what it should already know. Employers and banks send wage and financial info to Washington, but you’re required to file a duplicate report anyway. In Europe, many governments do the calculations (that is, bureaucrats work for taxpayers) and simply send the bill to Europeans, who check for accuracy.

But nooo—not with our IRS (It’s the other way around: We work for bureaucrats and send them redundant info.)

Moreover, the agency isn’t clear about certain rules, as the IRS (and its 76,000 employees) had remained silent on crypto guidance since 2014 (before some Dogecoin investors reached puberty).

I mean, how the heck are we supposed to account for all those forks and airdrops, some of which were given to us without knowledge or consent, as exchanges just deposited a bunch of sh*t-coins in unused wallets.

But it is what it is.

bitcoin tax meme
Photo credit: worldwideinterweb.com

“Cryptocurrency is taxed as an asset, like real estate or stocks. So you pay taxes on gains made or deduct losses,” says Steve McCullah, director of Apollo Foundation, the proprietor of APL privacy currency. “I have no doubt that will change in the near future, as the IRS has a hard time keeping their hands off our money. An example of this is the death tax—taxing a person simply for dying.”

McCullah tells CCN.com that burdensome regulations are part of what inspired his organization to build an unregulatable platform that is beyond the purview of any government.

April 15 reminds us what America’s Founding Fathers said about taxation:

“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical. – Thomas Jefferson”

“There are more instances of the abridgment of the freedom of the people by gradual and silent encroachments of those in power than by violent and sudden usurpations. – James Madison”

“If Congress can employ money indefinitely to the general welfare… The powers of Congress would subvert the very foundation, the very nature of the limited government established by the people of America. – Alexander Hamilton”

So you want to avoid fines or prison?

Good luck calling the agency: In 2016, the IRS answered 73% of incoming phone calls, with an average wait time  of 9 minutes (down from 21 minutes previously). During the government shutdown, there actually was no live customer service whatsoever.

Which begs the question: What the hell are you doing with the taxpayer-funded $11.5 billion annual budget? Luxury vacationing  on our dime? Actually, YES!

But you ain’t never gonna see these clowns or their special-interest benefactors or loophole-writing congressmen go to jail—no matter how obtuse the turpitude. Only citizens, who occasionally fall on hard times and lack cash, go to jail.

April 15: Circle your calendar.