A student from the state of California might have found himself in an unpleasant, to say the least, situation, owing upwards of $400,000 in taxes after turning a small investment of $5,000 to $880,000 at the peak of cryptocurrency prices.
From Rags to Riches
A student in the state of California had the run of his life last year, turning his small $5,000 investment into cryptocurrency to $880,000 in December 2017.
Speaking on his wild run, the student, who goes under the Reddit alias throwaway283921, said:
Well, I went down the rabbit hole and struck gold a few times, hitting 10x’s on multiple alt coins… I brought my 5k initial all the way up to a $880k portfolio in December 2017.
Unfortunately, 2018 hasn’t been nearly as good for investors. The cryptocurrency market plummeted, losing over 70 percent of its entire capitalization. From $800 billion in January, it’s currently sitting at a little over $211 billion. A lot of the coins issued through initial coin offerings have either tanked or lost over 90 percent of their value, which caused the young student investor to lose the majority of his riches. In his own words:
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.
While losing over $700,000 in a few months seems bad enough, the student has apparently found himself in a situation much more worrying than that. He notes:
I didn’t know anything about taxes so I never bothered to set aside anything. – He said, while adding – My estimated tax liability for 2017 is about 400k (live in California) […] I’m a student and I work part time making $12/hr as a retail associate at Barnes & Noble. I haven’t paid any taxes or filed any returns for 2017. I wanted to but I have no idea where to begin.
Unfortunately for the student, his gains occurred at the end of the financial 2017 year. While the users commenting on the story are mostly empathetic, the majority of them seem to share the same opinion that the student would have to pay the hefty tax bill.
The reason for this is because crypto-to-crypto transactions, despite not being cashed out in fiat, are still considered to be taxable events. Hence, the student, in the eyes of authorities, made a solid income, having turned $5,000 into $880,000 in just a few months in 2017. His losses, unfortunately, took place in the next financial year, making it impossible to offset the balance and compensate the gains in the previous fiscal period.
Understanding the way the tax system works and staying compliant is absolutely essential for every investor. According to a research from Fundstrat Global Advisors, the IRS can expect up to $25 billion in Bitcoin capital gains taxes for fiscal 2017.
What do you think of the student’s foray into the field of cryptocurrencies? Don’t hesitate to let us know in the comments below!
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