Hacker News Reader

Comment by personlurking | Hacker News Reader

Someone used a throwaway account to share their recent personal experience on this matter at /personalfinance, titled "I just discovered that I owe the IRS $50k that I don't have, because I traded in cryptos."

Original: https://www.reddit.com/r/personalfinance/comments/84huks/i_j...

Update: https://www.reddit.com/r/personalfinance/comments/89ipyu/upd...

They removed the story inside their update, but Google cached it: https://i.imgur.com/0DspXDr.png

View on HN

That makes NO sense at all and I continue to be surprised at the fundamental misunderstanding of the US tax system by techies (it's really not that complicated for individuals).

You pay tax on the GAINS, not on the value of the trade. If he owes the IRS $50k, it means he has a realized gain of ~$333,000. Where did that money go?

The only possibility here is that he took $330,000 and reinvested ALL of it into 'altcoins' just before the end of the year and is still holding them.

Sorry, but that has bullshit written all over it (throwaway account, too)

Anecdotally, it's my understanding that rolling all gains forward isn't an uncommon practice for non-professional traders -- especially during bull markets.

It doesn't necessarily have BS written all over it - in fact, I think there are MANY people who got left holding the bag with alts.

Depends. If he's in a high tax state and it was all short term capital gains, then those gains are taxable as income. If he didn't keep the tax money separate and the market tanks 80% (which it did) he'd end up with losses that can't be offset because you can't carry losses backwards, only forward.

You can end up in this situation if you traded profitably in 2017 (which is totally reasonable to expect due all the price hikes) and then lost a lot in trades in 2018.

As far as how he got $330k - each time you convert one crypto to another you realize gain/loss. And it is quite possible to expect him to do just that.

Super common situation is you make a couple trades in 2017'Q4 and 2018'Q1 during the bubble and just decide the whole thing is stupid and forget about it all because you never realized anything in USD and it's all fake. And then the IRS comes and says actually you owe USD. And the price dropped back down so you might not even have enough to cover it!

It does make sense.

I buy Bitcoin at $1000 in March. I trade my Bitcoin for Ripple in December when Bitcoin is worth $20000 and Ripple is worth $3. I have $19000 in gains because that is a taxable event. Fast forward to April and my $20000 of Ripple is now $3500 and I owe about $9000 in capital gains taxes.

Even if I sold everything I can't cover what I owe because the losses on Ripple are in the next tax year and not offsetting. This is obviously a worst case scenario but you can see how this could get you in trouble

The post didn't specify it was all short term gains. But even if they are, you still get to deduct your losses from any future capital gains once you sell at a loss. You and a lot of other replies seem to think I was saying it's impossible and arguing against that.

It's not. It's just highly improbably and extremely imprudent.

Alternatively, his altcoins bounce back up, he sells them and this time pays the tax properly.

The future capital gains may be at a much lower tax rate if spread over several years, so it doesn’t just cancel out.

> it means he has a realized gain of ~$333,000. Where did that money go?

Generally, the way this works is this:

1. You realize your gain in 2017 by exchanging for, say, ETH, at BTC $19k.

2. BTC falls to $7k, and ETH falls in accordance due to arbitrage desks.

3. You owe taxes on the 2017 gain. You could liquidate your much smaller ETH position in 2018, but you could only deduct $10k per year for 10 years on the large(r than 100k) loss you took.

My guess for how the OP has no assets left to pay the $50k liability is that they rode BTC down to $7k on margin. Buffett has a few things to say on the topic of leverage vs volatile assets.

Your point 3 is actually a little worse - the carry forward loss deduction from regular income is capped at $3k per year (but unlimited against both future short term and long term capital gains).

Can't he claim likewise exchange?

Short-term CGT in the US is around the 40-50% mark, something like that. Our hero bought 8 BTC for $7,200, or so goes their story, then sold it for $120,000-worth of altcoins, making a taxable gain of $113,800. 45% of that taxable gain = ~$50,000.

It is taxed as regular income so 10-40%

Short-term CGT is basically your ordinary income tax rate. So if you are taxed around 50%, then you aren't in the USA since the top rate is 39.6%. Also, your ordinary income tax rate depends on your income, the rate for $120k is 28% (but that only applies to income after 90k, before that it is taxed at 25% or less). You would only be taxed at 39.6% for gains after $418k.

Most Americans are also paying state / local / city taxes so it is possible to pay a ~50% marginal rate.

Some are, sure, but that would be high bracket. Glad to live in Washington state, at least.

1/ Short term, so 50k tax is 150k gains

2/ Your possibility is correct - the IRS computes tax on USD-equivalent as of trades completed Dec 31; but the USD price crashed in 2018'Q1, and he can't pay his tax bill in crypto. He can deduct the USD-equivalent losses next year but only against capital gains, not his W2 income, and the tax is due now in USD.

Continued: As a though experiment: lets say 100% of crypto traders owe 1/3 of their gains (obviously not real). There is nowhere close to enough USD liquidity to handle a sell like that and it would liquidate everyone and still leave them unable to pay their USD tax bill.

The apparent USD liquidity is mostly actually Tether liquidity. There is not actual USD liquidity – nobody is buying huge amounts of BTC who doesn't already have it – so we don't even have pricing data on what the USD price is, all that data has been corrupted by systemic exposure to Tether.

Obviously the thought experiment is totally absurd but it raises questions like, what exactly is the tipping point and how much liquidity is there actually?

Gains are only realized when they sell, so liquidity doesn’t matter if they don’t sell.

It matters if you traded alts, which all of reddit was doing for the last six months and what this whole issue is about

The IRS will only tax you on realized gains. Assuming individuals bought BTC (or alt coins or any other asset for that matter), and are still holding it, no taxes will be due until it is sold. If the individual sold their BTC in 2017, then they needed to have set aside a percentage of any profits for tax purposes.

So I'm inclined to agree with antisthenes, this person is either being untruthful or they lack a coherent investment plan and have a spectacularly bad tax planner.

How do you get a $50k tax bill implies realized gain of 330k? OP states $120k gain on top of 47k salary. To be generous, i'll first assume that he has had his salary withheld at the correct rates. Federally he will owe 32253 in additional tax (short term so treated as income, and marginally falls into a mix of 25 and 28% brackets). Must be that he also is in a high tax state. I understand California the best (which also might be the highest tax state). There, the gain would also be treated as regular income, and taxpayer would owe an additional 10458. So, 42700 in taxes. Running the numbers backward to find out income from tax liability is a little trickier, but it comes out to nowhere near 33000.

So perhaps the tax bill was not quite 50k, but it's certainly the right ballpark from what I can see. Very possible that he also under-withheld during the year, or had a higher gain, or his tax bill was a little lower, or had other issues that we don't know about. In any case, not what I'd call "makes NO sense at all" or indicative of a current fundamental misunderstanding of the tax system (saying nothing about his misunderstanding prior to the events).

Now, the bigger question I have is did this happen on a foreign exchange? Binance, bitfinex, etc? And if it did, has OP let the treasury know about his foreign accounts? FBAR is a real thing with huge penalties for non reporting and lying.

https://www.irs.gov/businesses/small-businesses-self-employe...

If it was all short term capital gains, then yes, but he would still have realized gains way over what the tax bill is. That wasn't specified in the post though. Usually capital gains refer to something that's taxed at a lower rate for assets held for more than 1 year, 15% (or 20% if you're in a higher bracket)

How tax/financial-illiterate do you have to be to pour ALL of your realized gains back into altcoins going into the next year?

The original post states that he bought in early 2017, and sold in late 2017. That makes it clearly all short term capital gains.

Trading between crypto, I would guess. You spend bitcoins to buy ether and you owe money.

Reply on news.ycombinator.com