A college student invested $5000 in Ethereum in May 2017, but the prices of ETH shot up to $1281 within a few months. However failure to file and pay taxes against returns got him under a tax liability of $400,000.

The US Government’s Regulations

In the United States, the tax form 1099-K is used to declare taxes for any cryptocurrency transactions. To simplify and automate the taxation process, tax filing systems were set up in major cryptocurrency exchanges.

Coinbase has new tools to aid investors, Coinbase has new tools to calculate gains, losses, trading and filing of taxes. Coinbase made these amends after losing over a million dollars to the revenue service of the US federal government, the IRS (Internal Revenue Service).

The Coinbase team said-
Gains on digital currency sales and exchanges are taxable in the US. For reference, here are the IRS guidelines for reporting digital asset gains. We understand taxes for digital currency can be complicated, so we updated our tax tools to make reporting easier.

From rags to riches and back

From a mere $50 per coin, the prices of ETH skyrocketed to $1281 in 2017. The ROI on ETH became 25-folds of the initial investment within a few months. For an investment of $5000, the student received a net profit of $875,000.

When the crypto-market reached a valuation of $800 billion in December 2017, the student also invested in other digital assets and ICOs. The student’s portfolio soon grew to $880,000 as an investor. Unfortunately, the story was soon to turn around. The student said –

I gambled in more than a few bad ICOs to start 2018, had some money in coins that absolutely plummeted with no chance of recovering, etc. Today my portfolio sits at $125k, a far cry from my $880k. My estimated tax liability for 2017 is about $400,000.”

Coinbase reported the student’s gains to the IRS throughout 2017. The report said that the individual did not transfer any of the gains to any bank account during this time period.

The student said –

These were crypto-to-crypto trades (i.e. Bitcoin for Ethereum, Ethereum for Litecoin). These are considered taxable events from what I understand. At no point did I ever cash out to fiat and transfer any USD into my bank accounts from these tradings.

The taxation policies surrounding cryptocurrencies remain ambiguous and complex in many regions, further complicating the taxation procedures for many investors. Companies like Coinbase are attempting to simplify the taxation process for their investors, though the area is still grey.