Cryptocurrencies have had quite an eventful year, but it's nothing compared to the free-for-all that is going on in the run up to Tuesday's national tax deadline.
Industry experts believe that much of the recent volatility in the value of bitcoin may have something to do with tax time. You see, although bitcoin and other cryptocurrencies are commonly referred to as a form of digital currency, in the eyes of the IRS, cryptocurrencies are capital assets, like stocks or commodities, and are therefore subject to capital gains taxes.
Over the course of 2017, bitcoin saw more than a 1,000% gain in price, creating some pretty significant capital gains for some investors. Tom Lee, managing partner at Fundstrat Global Advisors told MarketWatch that he estimates U.S. households saw about $92 billion in cryptocurrency gains last year. That would put them on the hook for $25.4 billion in taxes, under current law.
Given that huge tax commitment, it is possible that some investors would need to tap into their newfound windfalls to pay the tax man. If it sounds like a conspiracy theory, consider the data. At the beginning of the week, bitcoin fell below $7,000, a six percent loss in the currency's total value. By Friday morning, with tax day drawing closer, it climbed back up above $8,000, the first time in two weeks it had surpassed that threshold. That has some analysts thinking the tax day theory might actually hold water.
"The selling pressure associated with tax day has subsided right now," Ryan Taylor, the CEO of cryptocurrency software firm Dash Core told CNN. "As people get their tax returns, there may be new money entering the market."
But bitcoin price volatility isn't the only drama unfolding as we near the April 17 tax deadline. There's also the looming threat of widespread tax evasion.
According to Credit Karma, just a handful of Americans have reported their cryptocurrency holdings. CNBC reports that, of the most recent 250,000 filers on the Credit Karma Tax platform, fewer than 100 people reported capital gains on their cryptocurrency investments.
"There's a good chance that the perceived complexities of reporting cryptocurrency gains are pushing filers to wait until the very last minute," Jagjit Chawla, general manager of Credit Karma Tax, said to CNBC. "I want to reassure people that it's not as complex as it may seem at first glance and that Credit Karma Tax has a number of resources about how to approach bitcoin and taxes."
That may mean that much of the $25 billion in capital gains taxes that Americans are estimated to owe on their digital currency holdings which will go uncollected. With that much money at stake, it would only make sense that crypto holdings will start to become a major focal point in IRS audits.
So whether you're bouncing in and out of the crypto market, or simply taking a hope-and-pray strategy that the IRS won't come knocking, it's best to remember that staying 100 percent compliant is the key. Cryptocurrency is not going to fly under the IRS's radar. Being diligent and reporting now will save you a massive headache down the line.