A College Student and Ethereum

I have passed on Bitcoin and other cryptocurrencies.

I do not quite understand them, nor am I a Russian oligarch or Chinese billionaire trying to get money out of the country.

I certainly do not think of them as money.

The IRS agrees, having said that cryptos are property, not money.

This has very significant tax consequences.

I can take $100 out of my bank and pay cash at the dry cleaners, Starbucks, Jimmy John’s and Kroger without triggering a tax event.

Do that with a crypto and you have four taxable events.

That is the difference between property and money.

COMMENT: To be fair, money (that is, currency) can also be bought and sold like property. That is what the acronym “forex” refers to. It happens all the time and generally is the province of international companies hedging their cash exchange positions. Forex trading will trigger a tax consequence, but that is not what we are talking about here.

I am reading about a college student who in 2017 invested $5,000 in Ethereum, a cryptocurrency.

Within a few months his position was worth approximately $128,000.

He diversified to other cryptos (I am not sure that counts as diversification, truthfully) and by the end of the year he was closing on $900 grand.

Wow!

2018 has not been kind to him, however, and now he is back to around $125 grand.

Do you see the tax problem here?

Yep, every time he traded his crypto the IRS considered it taxable as a “sale or exchange” of property.

Maybe it is not that bad. Maybe he only traded two or three times and can easily pay the taxes from his $125 grand.

He estimates his 2017 taxes to be around $400 grand.

Seems a bit heavy to me, but let’s continue.

Does the IRS know about him?

Yep. Coinbase issued him a 1099-K reporting his crypto trades. Think of a 1099-K as the equivalent of a broker reporting your stock trades on a 1099-B.

He argues that he reinvested all his trades. He never took a personal check.

I don’t think he quite understands how taxes work. Try telling the IRS that you did not have taxable income upon the sale of your Apple stock because you left all the money in your brokers’ account.

He says that he reached out to a tax attorney – one who specializes in crypto.

I am glad that he sought professional help, whether attorney, CPA or EA.

I however doubt that the attorney’s crypto expertise is going to move the needle much. What he needs is a someone with expertise in IRS procedure, as he is rushing toward an installment plan, a partial pay or offer in compromise.

After all, he is not paying the $400 grand in taxes with what he has left.