If you had bought $1,000 worth of Bitcoin in January 2017, you would have $20,000 by the end of the year. However, if you choose to cash out, you could owe the government up to $7,000 worth of taxes.
According to a new bill that was signed by President Trump last December, starting January 1, 2018, all cryptocurrency trades will be subjected to taxes, and this includes the exchanging of one cryptocurrency to another. Cryptocurrency profits that are realized less than a year of the initial purchase are subject to income tax, while those that are withdrawn after a year are subject to capital gains tax.
However, with the volatility of Bitcoin’s value, keeping track of all our trades and the profits we made from them can be a nightmare. That prompts the question: Who actually does their cryptocurrency taxes?
Answer: Not A Lot of People.
According to a study by Credit Karma Tax, only a tiny percentage of Americans are actively reporting their cryptocurrency gains to the IRS.
In an official statement on Tuesday, Credit Karma revealed that lesser than 100 of 250,000 federal tax returns have been filed this year, despite the company preparing copies of Form 8949 for investors to report their cryptocurrency gains. That translates to a 0.04% rate of compliance.
According to Jagit Chawla, Tax General Manager at Credit Karma, he is surprised at the tiny fraction of people who are actually reporting their taxes.
"Generally, Americans with more complex tax situations file later in the tax season, especially if they expect that they'll owe money. However, given the popularity of Bitcoin and cryptocurrencies in 2017, we'd expect more people to be reporting."
It is evident that the crypto world is filled with millennials, though, as the company’s statistics show that 52 percent of its filers this tax season are millennials, while just 14 percent of taxpayers are aged 55 and above.
This lack of compliance amongst taxpayers when it comes to cryptocurrencies goes to show the challenges of reporting cryptocurrency gains. Brandon Williams, an investment banker who has been dabbling in cryptocurrencies for the past two years, believes that the lack of cryptocurrency tax filings "emphasizes the difficulty in accurately reporting your crypto gains and losses."
So far, the IRS has yet to release an official statement regarding this issue. They did, however, publish a document on their official website titled Notice 2014-21 that specifies in detail how “existing general tax principles apply to transactions using virtual currency”.