Two American crypto whales shine a spotlight on powerful crypto tax lessons learned at the hand of insufficient tax and crypto defense against the IRS.
Find out how avoidable mistakes and poor advice cost these two crypto whales over 1.3 million dollars in tax debt and penalties. Make sure to review the visual timeline for this 7 million dollar crypto court saga with our infographic featured at the end of this post.
Here is a penalty calculation estimate on the Strashny‘s attempt to get an installment agreement.
Note: The “6651(2)(2)” is what is commonly called the “Failure-to-pay” penalty.
Summary Of Facts
The taxpayers filed their tax return by April 15, 2018, and reported owing just over $1 million in taxes on their crypto gains. They did not pay the taxes hoping instead to pay over time using an IRS monthly installment agreement. The IRS collections office rejected their application because the couple could pay their taxes in full.
The taxpayers escalated the rejection through the IRS appeals process and until finally dismissed by US Tax Court on June 11, 2020.
Basic Crypto Tax Lessons Learned
This court case offers the following basic lessons. But there are also two more powerful lessons to be learned.
- The law requires taxes to be paid in full, even if that means selling your crypto assets or borrowing against them. The IRS can seize assets to force taxpayers to pay.
- IRS Installment agreements are available for debts under $100,000 because a personal financial statement is not required. This loophole is intended to simplify debt collection.
- Significant interest and penalties pile up while waiting on the IRS and appeals process. While dickering over the installment agreement rules, the initial debt of just over a million dollars grew by $80,000 by the end of 2018. The taxpayers then hired tax lawyers to argue their case before the US Tax Court. The lawyer costs (roughly estimated at over $10,000) are dwarfed by an additional estimated $170,000 in penalties and interest. This was the hidden cost of arguing a weak case in court.
This case offers some powerful crypto tax lessons about how to prepare smarter tax returns.
Powerful Crypto Tax Lessons Learned
Power Lesson #1: The most powerful tool for fixing a tax liability is an amended tax return.
The taxpayers rushed to file their tax return by the April 15th deadline. They never challenged the underlying tax liability. If their return had reported the crypto gains using like-kind exchange treatment, they could have eliminated the entire tax bill.
There was a lot of confusion in early 2018 (and remains) about how to report taxes on cryptocurrency income. If a doctor told you he had to cut off your arm, wouldn’t you get a second opinion?
Power Lesson #2: Like-kind exchange is a potent tool for crypto investors to reduce or eliminate their pre-2018 crypto tax liabilities.
During the run-up of 2017, most traders thought that crypto-to-crypto trades shouldn’t be taxed until cashed out. Like-kind exchange treatment does exactly this. The cumulative gain on crypto-to-crypto trades is deferred until finally traded for cash.
If this taxpayer’s 2017 return was amended to use like-kind exchange, the taxes owed would be reduced to near zero, and over $250,000 in cumulative penalties and interest would be erased. This is the power of an amended return.
Most crypto traders in 2017 didn’t even report their crypto transactions thinking that like-kind exchange was automatic. It wasn’t. All trades claiming like-kind treatment must be reported on Form 8824. If not reported, then there is no like-kind exchange treatment. It is considered a failure to report income on a return.
READ MORE: Tax Expert – Picking The Best Method For Reporting Your Cryptocurrency Gains
How we help you experience the best crypto tax lessons.
I have helped taxpayers defer over $40 million in gains using like-kind exchange. We’ve done significant legal research and considered over 1400 court cases on like-kind exchange. The legal position is strong. Every traders’ situation is different. Schedule a consultation at donnellytaxlaw.com to discuss if like-kind exchange would be right for you.
Make an appointment today with Clinton Donnelly, LLM, EA.
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Please note that as of June 24, 2020 both of the images for this post have been updated if you downloaded them previously.
Infographic source.
