The price of bitcoin soared by 1,221% in 2017, reaching nearly $20,000 in December—and making a lot of people rich, if they sold at the right time.
Now Tom Lee, a market strategist with Fundstrat Global Advisors, estimates that US households have about $25 billion in tax liability from cryptocurrency gains in 2017. (The IRS classifies virtual currency as property, so it taxes it as capital gains.)
Lee arrives at his $25 billion estimate this way: The overall cryptocurrency market gained $590 billion in value in 2017; Lee figures that 30% of crypto holders were in the US, totaling $187 billion in gained value; US households realize an average 52% of capital gains each year, and Lee applies the same ratio to crypto, yielding $92 billion in US taxable crypto gains; Lee then assumes a 50/50 split of long-term vs short-term capital gains, meaning an average gains tax rate of 27%, which gives you $25 billion in taxes owed from crypto gains.
That math obviously relies heavily on ballpark estimates, but it has the air of accuracy to it. Indeed, if you look at charts showing current bitcoin trading activity by volume, 30% of global trading activity is happening on US exchanges, and 37% of trades are being transacted in USD.
But Lee then posits that the recent selloff in bitcoin (down 28% in the past month, down 54% in 2018) is fueled by people selling crypto in order to get liquid funds to pay taxes on their 2017 crypto gains. “We believe selling pressures have been amplified by capital gains tax-related selling this year,” Lee writes. “If this is correct, we should see improved dynamics after April 15th.”
That’s a big leap, for one big reason: the majority of Americans who sold off crypto in 2017 at a gain are unlikely to report it on their taxes this year.
Last year, the IRS subpoenaed Coinbase, the No. 1 cryptocurrency brokerage site in the US, for information on every customer who conducted more than $20,000 in crypto transactions on the site between 2013 and 2015. It turned out that includes 14,355 Coinbase customers.
Fewer than 1,000 people per year are reporting crypto gains on their taxes
The affidavit of the IRS petition revealed some telling figures on crypto tax disclosures. In 2013, IRS senior revenue agent David Utzke wrote, just 807 individuals “reported a transaction on Form 8949 using a property description likely related to bitcoin.” In 2014, the figure grew slightly to 893 individuals. In 2015, it dropped to 802 individuals.
What matters here is that fewer than 1,000 Americans disclosed bitcoin gains on their taxes in 2015. Yes, the value of bitcoin ballooned greatly since then, but don’t expect the number of people disclosing their gains to shoot up by the same order of magnitude as the value has.
“That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years, and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year,” the IRS court summons reads, “suggests that many Coinbase users may not be reporting their bitcoin gains.”
The IRS is clearly reviewing the Coinbase customer data, and will come calling for those customers who reaped big gains and didn’t disclose. But beyond those people, whether the IRS can and will pursue those who don’t report their taxable crypto gains is very much in doubt. The IRS is infamously understaffed and underfunded. Credit Karma disclosed in February that just 0.04% of its customers were disclosing crypto gains. Americans just aren’t eager to offer up crypto gains taxes, either because they don’t want to pay, or because they’re in the dark about exactly how to do it.
Hiding your crypto gains from the IRS is a “three-year coin toss”
“If people play the game, there is a way for them to basically evade and make money on crypto and not pay taxes on it,” an enrolled agent (EA) tells Yahoo Finance, “but that is not the advice we give. It’s like, you’ve got the corner bank with the alcoholic security guard sleeping in front, and there’s a 16-year-old girl at the front desk, and the vault is open. It would be easy to rob, but that doesn’t mean you should do it.”
Indeed, the agency has three years in which to examine a return and assess an additional tax, unless it can prove evidence of fraud. So if you opt to hide your crypto gains from the IRS, “It’s a three-year coin toss,” says the same EA.
Playing that game of chicken is a big risk. The safest route? As former hedge fund manager Mike Novogratz advised to all cryptocurrency investors in a recent New Yorker profile: “Pay your taxes!”
Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.