Cryptotrader saves $471,000 on Taxes

How a Crypto Client  Saved $471,000!

It is a very common story I hear. An individual has huge gains trading crypto-to-crypto in 2017. In Spring 2018, he asks his accountant if he has to report the trading on his return. The accountant is clueless. The investor knows his return is not being done right.

In this particular case, the clueless accountant extends the return but never follows up with the client.  By 2019, the client is scared, realizing he never filed a tax return for 2017. There’s going to be penalties and interest. It’s going to be bad. He didn’t report his cryptos in 2016 either! What can he do?

Fortunately for him, he found me, the @CryptoTaxFixer.

He had two big problems: the unreported taxable gains and the unreported crypto activities on the anti-money laundering forms which are filed with the tax return.

If we had reported his capital gains as usual for 2016-2018, he would have owed $587,000 in taxes, penalties and interest. Also he would have owed a minimum of $60,000 in late filing penalties for the anti-money laundering forms. An estimated total owed of $647,000.

The solution I proposed was to treat the 2016-2017 gains as Section 1031 like-kind exchanges which defers the taxable event until later. This significantly reduced the 2016-2017 capital gains income which was causing high penalties. Because crypto prices dropped sharply in 2018, the losses offset the gains, saving lots of money.

The second step to the solution was to do a tax amnesty appeal to get a waiver of the late penalties on the anti-money laundering forms. Bottom line, he owed the IRS an estimated $176,000. This is a savings of $471,000. Incredible!

This is why you don’t want just any (or your old) accountant doing your crypto tax return, even if he is a CPA. An excellent tax professional pays for himself.

This client was a big trader. I would estimate that traders with at least $40,000 of gains in 2017 would possible benefit from this treatment. Like kind exchange calculations are very time consuming, so the cost of preparing like kind exchange returns isn’t cheap but the payback can be big.

Some caveats on this story. Starting in 2018, like kind exchange treatment of cryptos is no longer available in the tax code. I’m convinced it is a lawful treatment for crypto-to-crypto trades prior to 2018. As an Enrolled Agent with a law degree, I defend my clients through any IRS challenge right up through the appeals process. Using Section 1031 like-kind exchange doesn’t always reduce tax liability. Each case is different. Filing the anti-money laundering forms late is an automatic $10,000 penalty. Following the proper tax amnesty process is vital, so get help from an experienced professional. I’ve filed over 700 tax amnesty returns with 100% success rate.

Clinton Donnelly, LLM
Enrolled Agent

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