As Bitcoin continues its humongous run, soaring to new highs again this month, more and more investors are flocking to the cryptocurrency. Get-rich-quick artists and even mainstream investors are riveted by Bitcoin's 353% year-to-date return and the countless stories of early investors strutting around as newly-minted millionaires.
But despite the colossal gains and surge in new-fangled Bitcoin millionaires, few investors seem to be reporting their cryptocurrency windfalls on their U.S. tax returns. And experts warn this could mean huge penalties down the line.
Only 802 individuals reported gains from Bitcoin-related transactions (shown on Form 8949) on their tax returns in 2015, according to an affidavit from IRS agent David Utzke, filed in U.S. District Court earlier this year. This is a tiny fraction of the 150.7 million individuals who filed returns that year.
"The IRS figures hundreds of thousands of American residents did not report income from sales or exchanges of cryptocurrency and they might be able to collect several billion dollars in back taxes, penalties and interest," said Robert A. Green, a CPA, founder of Green & Co. Inc. and founder of Green, Neuschwander & Manning LLC tax and accounting firm.
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Indeed, Bitcoin has turned so many people into millionaires that traders have dubbed the coin "lambo," which refers to the amount of time it will take before they can cash out with enough to buy a Lamborghini, said Elliott Prechter, president of Qualitative Analytics, a tech-powered financial forecasting firm. Prechter has been tracking and writing about Bitcoin since September 2010 when it was trading a 6 cents a pop.
Prechter doesn't think Bitcoin tax dodgers are a big problem - at least not yet. "Even if hardly anyone is paying capital gains, it's probably because most are still holding their coins and haven't sold them," he said.
For now, the IRS relies primarily on the "honor system" for people to report their gains. For those who don't pay Uncle Sam, they could be slapped with a 20% negligence penalty or as much as a 40% penalty if the person understated their income by 10% or more, said Green.
Surging prices have pushed Bitcoin's market cap to more than $71 billion, while the value of all crytocurrencies, including Bitcoin, Etherium, Litecoin, and others, is $155 billion, according to CoinMarketCap.com - and growing each day. The potential tax windfall for the IRS is huge, and the agency is now aggressively taking steps to track and crack down on Bitcoin tax cheaters.
It recently asked Coinbase, one of the largest cryptocurrency exchanges for buying and selling Bitcoins, for its customer list of investors and traders involved in transactions valued at $20,000 or more.
Still, the IRS rules around Bitcoin are murky at best, leaving many cryptocurrency investors confused.
"There is a perception among many people that this is the wild west and the tax authority hasn't kept up with the technology," said Clyde Tinnen, a partner at Withers Bergman LLP law firm.