The IRS views bitcoin as property, and transactions using the cryptocurrency — whether to buy goods online or trade for another coin — are generally subject to capital gains tax. Noting all the U.S. dollar equivalents for individual buys, sells and profits for highly volatile digital assets can be cumbersome. If an investor is still holding onto cryptocurrencies bought last year, no taxes are owed.
Bitcoin multiplied more than 13 times last year, and the entire cryptocurrency market gained well over $500 billion in paper value. As a result, U.S. households likely owe $25 billion in capital gains taxes for their digital currency holdings, according to estimates from Tom Lee, head of research at Fundstrat Global Advisors.
Traders have attributed part of bitcoin’s more than 40 percent drop so far this year to investors cashing out to pay capital gains taxes ahead of the April 17 tax deadline. Bitcoin suddenly rallied 17 percent Thursday morning and traded above $8,000 Friday morning.
“If I had to guess, there’s probably a lot of underreporting,” said Elizabeth Crouse, a Seattle-based partner at law firm K&L Gates. “Most of the people in the cryptocurrency world tend to have a pretty high risk tolerance.”
That means they’re likely more willing to risk the chance the IRS comes knocking.