It has been widely reported that cryptocurrency users evade taxes. What evidence exists to support this claim? A single, incomplete report from Credit Karma. That is no evidence at all. As has been noted in the past, lack of regulatory clarity leads to impossibilities in reporting gains. Saying that all cryptocurrency users evade taxes amounts to liable. Reports by Market Watch and Forbes provided most of the information used in this article.

Mockingbird media claims crypto users evade taxes

It’s interesting to note that this one misleading article appeared on dozens of different sites on April 13.

It has also been posted on a few different dates, but it appears as though this one report was disseminated in an attempt to make it appear as though cryptocurrency users evade taxes. Many thousands of people file their taxes through Credit Karma, apparently (who knew?). Even before this Tax Day, April 17, headlines were screaming about the alleged criminality of the average cryptocurrency user. Or rather, the alleged criminality of all crypto users, period.

Credit Karma had processed the tax returns of about 250,000 people as of April 15, 2017. And of that quarter-million, about 100 (0.04 percent) had reported their gains or losses from cryptocurrency transactions. Therefore, all Americans have been proven to be evading taxes due on their crypto gains, or so the story goes.

Notice the gigantic leap in logic present in this line of thinking.

Figuring out where to begin in dissecting this flawed logic is almost as difficult as determining one’s tax liability for cryptocurrency transactions.

First, note the source cited for this outrageous claim. One agency that files taxes, Credit Karma, put out this insignificant report. The report included data on 250,000 people.

Assuming approximately 150 million Americans owe tax (half the population), this amounts to less than 0.2 percent of all taxpayers. Of this 0.2 percent, no mention of how many were regular cryptocurrency users was made – only that 100 out of the 250,000 had reported any gains. It could be that those 100 people were the only ones in Credit Karma’s sample that had anything to report, in which case it could be said that 100 percent of crypto users always report their gains. This claim is no more or less ridiculous than the claim that all crypto users evade taxes. Both are based on pure speculation. In addition, tax season was not even over at the time of this report. Several days were still left to file.

How many people do you know that filed their returns almost a week early and used Credit Karma to do so?

There is also a MarketWatch report circulating that surveyed 2,600 cryptocurrency users. Of those 2,600, a reported 46 percent claimed they had no intention of reporting cryptocurrency gains. While this seems more credible than the Credit Karma quackery, it's still a very small sample that lacks crucial information (this article even cites that same hilarious Credit Karma report!). Of those 2,600, how many had more than $100 worth of cryptocurrency? How many made a taxable transaction? What kind of annual income did these people have? Of course, none of this information will ever be known.

The survey was conducted using an anonymous social app for tech employees. Again, there is no evidence that crypto users evade taxes. But there is certainly evidence that crypto users could be construed as b no matter what they do.

Failure to comply does not mean crypto users evade taxes

In 2014, the IRS issued guidance declaring Bitcoin to be a form of property. As such, all cryptocurrency is to be treated as property, and therefore subject to Capital Gains Tax. As I’ve written previously, the prevailing regulatory landscape makes it all but impossible for most to even begin attempting to report their capital gains tax if they are required to. In addition, many who hold crypto do not owe anything under current laws.

The only taxable transaction happens when a sale of crypto for fiat dollars takes place. And that’s the easy kind of transaction when it comes to reporting.

Purchases made using cryptocurrencies like Bitcoin or Litecoin are also considered sales of property. Think about how impossible this would be to calculate if you had dozens or hundreds of purchases using crypto throughout the year. At what price do you consider to have bought the currency in question? How do you determine how much you gained, given you only sold a small portion of it? What about miner fees and exchange fees – how do those factor into the whole equation?

With one buy of a whole piece of property and one sell of the same piece of property, the math is simple.

A purchase of $1,000 worth of property later sold for $2,000 during the same year would incur short-term capital gains tax, roughly 30 percent. In other words, you would owe 30 percent on the $1,000 profit you made. Unfortunately, this is not how it works with cryptocurrency, which comes in infinitely smaller increments. If you exchanged $1,132 for 1.0 Bitcoin in January 2017, for example, and later bought an area rug on Overstock.com for $30 when the price of one Bitcoin equaled $1,573, where do you begin? What if you hadn’t bought an entire Bitcoin at one price, but instead bought many smaller portions over time, all at different prices?

As you can see, things get rather complicated very fast.

A single purchase of bitcoin and a single sale for dollars would be easy to deal with. But other than that, it becomes unclear how to even start thinking about all this. Classifying cryptocurrency as property was perhaps one of the worst ways to make transactions reportable. It did, however, ensure that one of the highest taxes possible would be applied in the form of capital gains tax. It seems reasonable to assume that this was the primary motivation for such a classification, seeing as nothing else makes any sense.

There's an app for crypto sales

To be fair, there are a number of Certified Public Accountants and other legal experts that have begun tackling this issue. It's not hard to find a dependable source on the subject if you are looking for actual advice (nothing here can be construed as actionable advice - this is only an opinion piece).

There is even an app for that. Several, in fact. BitcoinTaxes, CoinTracking, and others are all dedicated services assisting people in reporting capital gains tax associated with sales of cryptocurrency. So, it can be done. In addition, Forbes has reported on some of the most popular tools to help calculate crypto transactions. Consider this - if all crypto users evade taxes, how is there even a market for apps like this?

Of course, many people who hold cryptocurrency never make a single sale for fiat, which is another reason why it's unfair to claim that crypto users evade taxes.

Capital gains tax only applies when an asset is sold. If there's no sale, there's nothing owed.

Claiming crypto users evade taxes amounts to liable

All in all, the treatment of cryptocurrency users in the mainstream press is totally unacceptable. It has reached epic levels of liable. The insinuation that anyone who participates in this monetary system must be some sort of criminal harkens back to the early days of the internet when some said cyberspace had no use outside of criminal activity. In the near future, all pundits and publications making similar statements regarding crypto and those who use it will look similarly ignorant.

Furthermore, all of this is a moot point. The Internal Revenue Service does not need your tax dollars, whether they come from capital gains tax or elsewhere (interesting side note: all 500 of the people who work at the IRS pay zero tax - they simply mark themselves as "exempt.").

Every American citizen could be taxed for 100 percent of their income and it wouldn't make a dent in the national public debt. Annual tax revenue does not provide for annual government budgets, only ever-increasing amount of debt can do that. The debt is supplied by the Federal Reserve. The Fed simply prints Federal Reserve Notes and lends them to the US Treasury in exchange for bonds. The Treasury then owes interest on those bonds. This means that the Treasury owes interest on the very currency it uses for its machinations.
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