Crypto Investors Low on Funds Might Have To Cash Out To Pay 2021 Tax Bill

Accountants focused on digital assets are bracing for clients with hefty crypto tax bills, payments made more difficult by the recent crypto sell-off

article-image

Source: Shutterstock

share

key takeaways

  • Investors may not have earmarked enough cash to meet crypto tax bills
  • For many retail traders, it’s difficult to first discern how much they owe

As tax season ramps up, cryptocurrency accountant eyes are on looming tax bills that investors may not have earmarked enough cash for.

“If people are liquidating coins to come up with the cash for taxes for 2021, that also creates a taxable event for 2022,” said Shehan Chandrasekera, head of tax at Coin Tracker. “It’s going to get messy.” 

As retail investors report 2021 cryptocurrency trading activity, they might be surprised by their tax bill — particularly newcomers, Ledgible CEO Kell Canty said.

“Come April 15, a lot of investors are going to see that they had a taxable event where they either sold crypto for crypto or sold crypto for USD, and they didn’t allocate any portion of that to satisfying the capital gains,” Canty said.

It can be complicated to track and report gains, Canty said, especially in cases where investors shifted profits from one token to another. The recent selloff has compounded those concerns, leading to the possibility that underwater, cash-starved investors won’t be able to satisfy their tax obligations.

“It’s unfortunate,” Canty said. “That’s why people need to be more thoughtful about planning that and using tools to track all of their crypto across all different exchanges and wallets and custodians and DeFi protocols to get a sense for the realized and unrealized gains that they have.”

Aside from figuring out how to pay taxes, retail investors may have a hard time pinning down how much they owe, according to Chandrasekera.

“Reporting is a huge problem right now, because exchanges are doing different things,” Chandraseker said. “If you take a look at centralized exchanges, they issue, I would say, four different types of tax forms, depending on how they interpret the existing tax codes, given the gray area, so people are very confused.”

Investors using decentralized exchanges or more than one exchange may have a particularly difficult time.

“Exchanges only have visibility into what’s happening inside that exchange,” Chandrasekera said. “But to figure out your taxes correctly, you need to connect all your wallets and exchanges and figure out that actual capital gain or loss.”

There is precedent for retail investors liquidating holdings for the tax man, said Jordan Bass, owner of Taxing Cryptocurrency.

“In 2018, there was a big top in crypto markets, then the price retraced in February, we had a little bit of a pump into March and then in April, when we were leading into tax planning, we saw a significant retracement,” Bass said. “I think maybe there was some correlation.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Permissionless is a conference for founders, application developers, and users. Come meet the next generation of people building and using crypto.

recent research

Blinks Report Image.png

Research

Blinks enable the ability to vampire attack user monetization of existing networks by inserting onchain and financialized functionalities directly within the popular social feeds and digital experiences of today.

article-image

Plus, how the FTX collapse played out in Asian countries

article-image

Kalshi founder Tarek Mansour said Thursday marked the “the first trade on regulated election markets in nearly a century”

article-image

I was excited about being on the precipice of realigning societal incentives and solving many issues plaguing our modern financial world

article-image

Cypherpunk Holdings has rebranded to Sol Strategies in a pivot to a Solana-first investment approach

article-image

BitGo’s wrapped bitcoin (wBTC) has a new custodial challenger

article-image

Make no mistake: Tether makes a ton of money. But exactly how much depends a lot on the price of bitcoin.