bitcoin taxes
Bitcoin,  United States

Yes, you need to pay taxes on your crypto profits

Data suggest you’re probably not going to tell the IRS about your gains

As popular as it is to trade cryptocurrency, it seems it’s even more popular to hide it from the government.

The American tax deadline is nigh, so U.S. citizens are tabulating their finances for Uncle Sam to take his cut. But a survey of 250,000 people filing their taxes on a platform called Credit Karma reveals that only 100 of them are declaring capital gains income from their cryptocurrency holdings. It’s a safe assumption that most traders aren’t reporting jack squat.

Bitcoin tredecupled in value (that is, it climbed in value more than 13 times) last year, helping to turn cryptocurrency at large into a $500 billion sector. Thomas Lee, head of research at Fundstrat Global Advisors, estimates that American households owe some $25 billion in tax on their cryptocurrency holdings. But crypto investors have a notoriously high risk tolerance—they might just be seeing how far they can go before they sufficiently rile the tax man into taking action.

The Internal Revenue Service is clear on how it views cryptocurrency when it comes to tax implications—it’s property, not income. If you buy bitcoin at $1,000 and sell at $5,000, you’re on the hook for $4,000 of capital gains. HODLers get to keep their digital assets for as long as they want without fear of the IRS breathing down their necks; it’s the selling of cryptocurrency at a profit that leads to tax liability.

This means that if you are going to play by the rules, you must keep track of the price at which you bought a coin and the price at which you sell. This can be an inconvenient process, but there are more than a few automated tools to make it manageable. Popular exchange Coinbase has its own crypto tax calculator, and Bitcoin.Tax is a handy destination for determining your tax bill as a result of cryptocurrency activity.

There’s perhaps a conception that cryptocurrency is thoroughly off the government’s radar and there’s no need to declare your “invisible” money. This is more than inaccurate. Blockchains keep perfect public records, and blockchain forensics is a specific branch of the crypto world aimed at getting to the bottom of who and what was involved in a transaction. When you pair this with the fact that the IRS has access to the National Security Agency’s vast stores of data, it is not exactly a sure thing that you’re crypto wealth lives outside the long reach of the law.

Use free tools to keep good records, declare your gains honestly, and you’re sure to never have a problem. With trillion dollar budget deficits around the corner, the IRS is  incentivized to aggressively pursue taxes owed from people’s crypto gains, so be ready for them to collect.

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Dylan Love is an editorial consultant, contributing reporter, and fiendishly curious technology enthusiast. He owns no cryptocurrencies.