These crypto investors lost big coins and now the tax bill is due

After a record year of growth, many cryptocurrency investors filed returns this spring with incredible gains — some in the range of 20 to 30 times their original spend. But now it’s time to settle accounts with the IRS, and there’s a problem: the money’s gone.

The crypto market experienced its worst crash in years this month, wiping out more than $400 billion in value in just a few weeks. Message boards have been inundated with comments from people saying they’ve lost all their life savings and others fearing they might lose their homes. Tax attorneys specializing in crypto told The Daily Beast that they, too, were inundated with calls from people who had lost more taxes than they owed.

“This is the biggest problem in crypto right now,” said Clinton Donnelly, the founder of CryptoTax Audit. “We have several clients that just got wiped out and they’re just scared.”

Donnelly recalled a client who made $700,000 trading cryptocurrencies last year but didn’t think about converting some of that money into cash to save for tax season. When Donnelly’s company told him what he probably owed, he was horrified. Much of that $700,000 had evaporated in the crash. Customers like this, Donnelly said, “are panicking. You don’t really know how to proceed with the preparation of the tax return. It’s a serious ethical dilemma.”

Many tax advisors agree that this is a key reason tax season is a nightmare for crypto fans. When someone receives a paycheck or sells traditional stocks, the proceeds appear as cash in their bank account, which is relatively easy to put away for tax season. But with crypto trades, Donnelly said, “people don’t think they’re actually making money.”

“They never thought about estimated taxes and savings,” he said. “They thought there would always be enough left over at the end of the year to pay their taxes.”

That’s one of the reasons Andrew Gordon, a Chicago-based crypto tax attorney, said he gets calls every day from crypto investors struggling to pay their taxes. On Friday afternoon, he said, he received calls from two such customers — one of whom asked about the legality of simply not speaking up. Gordon advised him against it, but admitted: “It’s a pretty crappy situation. Because to actually pay the tax, you could get wiped out.”

Crypto traders are especially vulnerable during tax season, Gordon said, because the market is more volatile than the traditional stock market. A recent example of this is Luna — a so-called “stablecoin” whose value is supposed to be pegged to the US dollar — which recently fell a staggering 99 percent in a single day. On the traditional stock market, Gordon said, “you don’t usually see a billion-dollar project go that shit.”

Crypto investors also tend to be younger and less financially conscious than typical stock market investors, Gordon said. And the rise of investment apps like Robinhood has made trading feel more like a game and less like a serious financial decision with long-term ramifications.

Crypto traders, Gordon said, “are a lot of millennials, a lot of younger people who wouldn’t normally get into debt.”

“Now, for the first time in their lives, they’re going to have tax debts for some shit they don’t even have money for,” he added. “You’re just messing around with some app and you’re going to owe massive amounts of tax now.”

Individuals who cannot afford their tax bill generally have two options: they can “agree” with the IRS on an amount that the agency determines they should be able to pay, or they can enter into a payment plan under which they can Pay a down payment percentage of their tax bill each year. Gordon says he has clients who are still paying their tax bills from a crypto market crash in 2018.

Neither option is ideal, so some investors are considering simply not paying them at all — or at least waiting for the market to pick up again. Donnelly said 50 to 100 people have called him this year to ask what would happen if they were there by April 15.

Of course, this strategy is risky because it means betting that the market will bounce back before the IRS cracks down — usually in November or December, Donnelly said. An even riskier choice is to simply not report crypto earnings at all. Donnelly said he’s spoken to many people who did this after the 2018 crash and are now trying to edit their returns retrospectively for fear of scrutiny.

“It’s a very serious matter,” he said. “You go from the excitement of ‘Oh wow, I’m worth a million,’ to all of a sudden, ‘I’m wiped out and I have to engage in fraud and hide from the IRS.'”

Joshua Azran, a California accountant who specializes in crypto, said he is “absolutely” seeing clients unable to pay their taxes this year, albeit not to the extent of 2018. A bigger problem now is the rise of questionable crypto projects like memecoins or outright scams like “rug pulls”. (A “rug pull” is when someone raises money for a coin — sometimes millions of dollars — and then disappears with the proceeds.)

While more traditional losses like burglaries and Ponzi tax schemes are easy to deal with, the rules surrounding these crypto scams are less defined. In some cases, Azran said, investors fooled by these counterfeit coins will be hit twice: when the coin’s value collapses, and again when they can’t write it off from their taxes. “It’s kind of an injury, if you will,” Azran said.

Despite all of this, some crypto enthusiasts say they’re still in it for the long haul. One of them, a 38-year-old registrant named Lauzrus Esteban, said he lost his entire life savings in the Luna crash earlier this month. He lost enough in crypto the year before that he actually got money back for his taxes this year, but not enough to cover the credit card debt he accumulated while investing all of his earnings in the crypto market.

Still, he said, he won’t take his money out of the market.

“I’ve already decided that I’m willing to lose whatever I have there because I’ve heard you only make real money during bear markets,” he said. “So I’ll risk it. I risk everything.”

He added: “I still think it’s going to be the future.” These crypto investors lost big coins and now the tax bill is due


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