Riding high off a record year of growth, many cryptocurrency investors filed tax returns on mind-boggling gains this spring—some in the range of 20 to 30 times their original outlay. But now it’s time to settle up with the IRS, and there’s a problem: The money isn’t there anymore.
The crypto market endured its worst crash in years this month, wiping out more than $400 billion in value in a matter of weeks. Message boards were flooded with comments from people saying they’d lost their entire life savings, and others who worried they could lose their homes. Tax attorneys who specialize in crypto told The Daily Beast they, too, were inundated by calls, from people who had lost more than they owed in taxes.
“This is the biggest issue in crypto right now,” said Clinton Donnelly, the founder of CryptoTax Audit. “We have several clients who have just gotten wiped out, and they’re just terrified.”
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Donnelly recalled one client who made $700,000 last year trading between cryptocurrencies, but didn’t think to convert any of that money to cash to save for tax season. When Donnelly’s company told him what he likely owed, he was horrified. Much of that $700,000 had evaporated in the crash. Clients like this, Donnelly said, “are in a panic. They don’t really know how to go forward on preparing the tax return. It’s a serious ethical quandary.”
This, many tax advisers agree, is a major reason tax season is a nightmare for crypto fans. When someone gets a paycheck or sells traditional stocks, the proceeds appear as cash in their bank account that is relatively easy to put away for tax season. But with crypto trades, Donnelly said, “people don't think they’re actually making money.”
“They have never thought about estimated taxes and saving as you go,” he said. “They thought there would always be enough at the end of the year to pay for whatever taxes they had.”
That’s one of the reasons Andrew Gordon, a Chicago-based tax lawyer who specializes in crypto, said he gets calls daily from crypto investors struggling to pay their taxes. On Friday afternoon, he said, he had gotten calls from two such clients—one of whom was asking about the legality of simply not reporting. Gordon advised him against it, but admitted: “It’s a pretty shitty situation. Because to actually pay the tax, you could be wiped out.”
Crypto traders are especially vulnerable come tax season, Gordon said, because the market is more volatile than the traditional stock market. A recent example of this is luna—a so-called “stablecoin,” the value of which was supposed to be pegged to the U.S. dollar—that recently fell a jaw-dropping 99 percent in a single day. In the traditional stock market, Gordon said, “usually you don't see a billion-dollar project go to shit like that.”
Crypto investors also tend to be younger and less knowledgeable about finances than typical stock market investors, Gordon said. And the rise of investing apps like Robinhood have made trading feel more like a game, and less like a serious financial decision with long-term consequences.
Crypto traders, Gordon said, “are a lot of millennials, a lot of younger people that typically wouldn’t incur debt.”
“Now for the first time in their lives they’re going to have tax debt on some shit they don't even have cash for,” he added. “They’re just playing around on some app and now they’re going to owe massively on taxes.”
People who can’t afford their tax bill generally have two options: They can “settle” with the IRS for a sum that the agency determines they should be able to pay, or they can enter into a payment plan under which they pay down a percentage of their tax bill every year. Gordon says he has clients who are still paying off their tax bills from a 2018 crypto market crash.
Neither option is ideal, so some investors are considering simply not paying it at all—or at least waiting until the market comes back up. Donnelly said 50 to 100 people had called him this year to ask what would happen if they didn’t pay up by April 15.
That strategy is risky, of course, because it means betting that the market will come back up before the IRS cracks down—usually around November or December, Donnelly said. An even riskier choice is to simply not report crypto earnings at all. Donnelly said he’s spoken to many people who did this after the crash of 2018, and are now trying to retroactively edit their returns for fear of being audited.
"It's a very serious thing,” he said. “You go from the exhilaration of, ‘Oh wow, I’m worth a million,’ to all of a sudden, ‘I'm wiped out and I have to enter into fraud and hide from the IRS.’"
Joshua Azran, a California accountant who specializes in crypto, said he is “absolutely” seeing clients who are unable to pay their taxes this year, though not to the extent he saw in 2018. A larger problem now, he said, is the rise of questionable crypto projects like memecoins, or outright scams like “rug pulls.” (A “rug pull” is when someone raises money for a coin—sometimes millions of dollars— and then disappears with the proceeds.)
While more traditional losses like burglaries and Ponzi schemes are easily dealt with in tax law, the rules around these crypto scams are less defined.. In some cases, Azran said, investors who are duped by these fake coins get hit twice: when the value of the coin collapses, and again when they’re unable to write it off their taxes. “It’s kind of adding insult to injury, if you will,” Azran said.
Despite all this, some crypto enthusiasts say they’re still in it for the long haul. One of them, a 38-year-old registered named Lauzrus Esteban, said he lost his entire life savings this month in the Luna crash. He lost enough in crypto the year before that he actually got money back on his taxes this year, but not enough to cover the credit card debt he accrued while putting all of his earnings into the crypto market.
Still, he said, he’s not about to take his money out of the market.
“I’ve already decided that whatever I have there I'm willing to lose, because I’ve been hearing you only make real money during the bear markets,” he said. “So I’m risking it. I’m risking everything.”
He added: “I still think it’s gonna be the future.”
