Some cryptocurrency traders have made figurative killings with their investments. The world of cryptocurrency investment and speculation indeed has an otherworldly sense to it, both because of the unique nature of cryptocurrency and its roller-coaster rides for investors.
Tax law, though, doesn't change for the whims and winnings of cryptocurrency investors. Traders may unwisely assume that the IRS will treat their spectacular earnings with an unusual degree of unearned grace. On the contrary, the IRS takes the same view of cryptocurrency gains as it does gains from traditional investments. Indeed, our team has noticed a recent uptick in cryptocurrency audits, even addressing potential criminal tax charges involving allegedly unreported cryptocurrency gains.
One recent cryptocurrency Tax Court case illustrates the compliance challenges. That case reports that two taxpayers, Alexander and Laura Strashny, earned cryptocurrency gains in a single year, the income tax and interest on which exceeded $1.1 million. Rather than pay the tax when filing their return, they filed the return without payment, later filing a request for installment payments. Better, they thought, to spread the tax payments out over a few years.
Yet installment agreements typically require a justifying rationale such as that the taxpayers do not have sufficient assets to full pay the liabilities. These taxpayers, though, made no such assertion in their installment-agreement request. They soon released to the IRS investment statements showing that they held cryptocurrency assets worth over $7 million. Winners, indeed.
Given the taxpayers' apparent ability to pay the tax all at once, the IRS did not look kindly on their installment agreement request. Instead, the IRS served a final notice of intent levy, the first step necessary to levy to collect the full tax amount with interest. The IRS then denied the installment agreement request at a subsequent hearing. The Tax Court case affirmed the IRS rulings, allowing the IRS to proceed with a levy.
If you invest in cryptocurrencies and have tax questions, then seek expert legal counsel. Contact Brandon Keim to consult on cryptocurrency tax-collection issues and other tax and legal problems.