Why Aren’t People Paying Their Crypto Taxes?

Credit Karma reportedly said that as of April 13 fewer than 100 of their 250,000 most recent tax filers reported cryptocurrency transactions. That isn’t encouraging, but it makes sense from some perspectives.[1]

Why does it make sense you ask?

Here is my top 10 of why it makes sense to me that people haven’t been reporting crypto to Credit Karma yet:

  1. The big players (whales, exchanges, hedge funds, developers, talking heads, etc.) ARE reporting or filing an extension and estimating payments for the most part. They just aren’t using Credit Karma. Instead, I assume many in this group have tax professional helping them and are aware of the requirements.
  2. Many small players didn’t trade and thus don’t have to report. Or if they did, they used Bitcoin and Ether to buy coins like XRP and ADA or to buy something online. They likely don’t realize that the “purchase” was a taxable event.
  3. People tend to file early if they are expecting money back. Usually people wait if they owe money and file early if they need money back; it’s basic logic. Some people who need money back may not be buying and investing in internet money.
  4. Accounting for your crypto trades is next to impossible if you traded a lot and moved funds around. People are probably stressing down to the wire before they capitulate and file an extension (just being blunt here).
  5. Many people have never had capital gains before (if you don’t count pensions and 401ks and such). Most people are “labor.” Labor typically doesn’t do a ton of filing, they generally just have their wages withheld by their job. There is potential they don’t fully get what is required.
  6. Many crypto investors are young people. They probably have no experience with complex tax reporting requirements and capital gains.
  7. I get the feeling that tax prep companies and accountants aren’t stressing to their clients that hiding crypto trades can be considered tax fraud. Calculating profits and losses is about as hard for these companies as it is for normal people. If they haven’t been working on software to figure it out, I don’t see how these services would do it by hand? This is pure speculation, but I feel that, if one of these services had it figured out, they would tout it.
  8. People with small gains last year and losses this year might assume they don’t owe taxes (not understanding how capital gains vs. losses work intra-year). In fact, just speaking generally, many people lost a lot of money and since they don’t have profits anymore, they might imagine they don’t owe anything. They might be under the impression they don’t owe what they don’t have (the Wesley Snipes fallacy). To be clear, not paying taxes on money you don’t have anymore is why famous new rich people end up bankrupt or in jail for tax fraud after making millions. That is the thing.
  9. People are waiting until the last minute. They aren’t necessarily dodging taxes; they just don’t realize that waiting until the last minute is going to be really tricky given what is required.
  10. Crypto has been going down for a while now (mostly, there have been a few green days here and there). People are likely waiting until the last minute to cash out and pay up hoping that crypto will go up. As a little bonus, it did go up from its low here on Monday a few days before tax day.
  11. People are trying to pull a bunch of shade thinking that they are going to get away with feigning ignorance. That is a gamble that could result in audits, fees, and worse but, crypto is a high-stakes volatile 24/7 global market. So one could see some people into crypto gambling in this sense too.
  12. A lot of people likely never took money out of their Coinbase accounts (but did trade). They might be under the impression that you don’t owe taxes on it until it goes back into the bank (that would be reasonable, but it isn’t the case).

I assume there are a few extra reasons out there that I haven’t covered, but in short:

The big players are paying taxes, but many are probably waiting until the last minute because they lost money, crypto is down significantly from where it was, and what is required is extremely difficult to produce. I don’t think people are purposefully avoiding reporting. Instead it seems to me that this is a result of the reality of what happened from 2017 to 2018, mixed with the reality of what is required, mixed with some good old fashioned procrastination.

TIP: For anyone who doesn’t know, you have to pay by the 17th, but you can file an extension if you can’t figure out the reporting on time (you still have to pay but you get extra time to report). This has implications, but it is an option on the table. Learn more about filing an extension.

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Citations

  1. Few Reporting Bitcoin Holdings on Taxes: Credit Karma. Investopedia.com.

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