2017 was a great year for crypto investors. At its peak in December, Bitcoin was trading at nearly $20,000—but over the year to come, it all came crashing down, currently sitting at $3433 per coin as of the end of January 2019.
If you’re a lifetime HODLer, you’re used to the peaks and valleys and patiently waiting for the price to rise again.
However, if you used a chunk of your huge 2017 investment gains to purchase another type of cryptocurrency, and then saw that coin lose most of its value in the following year, you might be in a difficult position as tax time approaches.
Consider this Reddit poster’s sob story: He struck gold by investing $5000 into crypto in May 2017, seeing that investment jump all the way to $880,000 by the end of the year. At that point, he traded in some of his gains to purchase new forms of cryptocurrency, and saw many of them tumble, along with his initial portfolio. At the time of his post, his portfolio was down to $125,000, but he believed his tax liability to be around $400,000.
Your situation hopefully isn’t quite as dire, but if you know you owe a bigger tax liability due to your crypto rollercoaster ride, what should you do? Here are a few pointers:
Use a crypo tax software solution to make sense of your liabilities.
First thing’s first—is it really as bad as you think? Rather than trying to calculate your tax liability manually, try plugging all of your crypto transactions into a Crypto tax software solution like ZenLedger, which can give you an accurate assessment of what you owe. (Then you’ll know whether it’s time to panic or not.)
Hire a qualified CPA who understands cryptocurrency.
Yes, it’s difficult to think of spending more money when you’re already in a difficult spot, but a good CPA may be able to save you thousands of dollars on your tax bill. Make sure that you work with someone who is familiar with how cryptocurrencies are treated within the Crypto tax code, and can use whatever legal loopholes possible to minimize your obligation for the year.
Work out a payment plan with the IRS.
Your tax bill won’t go away, but you don’t need to pay the whole thing at once if you don’t have the cash on hand. The IRS offers several options for short- or long-term repayment plans using regular installments. Interest rates for these plans are generally 5% or lower. Visit the IRS’ repayment plan page to learn more about the program and see if it’s a fit.
Know that you can write off losses in years to come.
Even if your tax bill might sting if you sold crypto in early 2018 and have lost money on subsequent trades, remember that you can still write off those losses if you’ve sold the coins in the interim—just not all in this tax year. In cryptocurrency, you can make the most of Cryptocurrency taxes loss harvesting by selling any coin when it is down and then immediately repurchasing it without any tax implications. This means that, if you purchased $17,000 worth of ETH and it’s since gone down to $8,000, you have $9,000 worth of losses that you can write off against your other income to minimize future tax bills. You can write off up to $3,000 in losses against gains or income in each tax year, so you’ll be able to take that $3,000 write off over the coming three tax years.
Don’t ignore your tax bill.
The most important piece of advice here? Don’t run away from your tax bill, even if you can’t pay it all in one hit. The longer you try to avoid paying your liability, the more interest and penalties will add up. In a worst-case scenario, failing to report your cryptocurrency tax obligations could cost you $250,000 and prison time—not counting the additional interest and penalties due on the amount owed.
Of course, it’s never a great situation if you can’t afford to pay your tax bill. But take a deep breath, and seek expert advice. By taking the time to consider how to deal with the bill, you’ll go a long way towards building a sustainable solution to the problem.