Almost 36% of Bitcoin Investors Plan to Commit Tax Fraud in This Year

Bitcoin is making people rich

As you might have imagined, bitcoin led the charge higher. After beginning the year at $967 per coin, bitcoin surged, at one point, to nearly $20,000 per coin and a market cap well in excess of $300 billion. As the most traded cryptocurrency in the world, and the one accepted by more merchants than any other digital coin, it's become the face of the crypto craze.

Bitcoin has also been a source of incredible profits for investors -- especially those who've held over the long run. For instance, the Winklevoss twins' initial investment of $11 million was actually worth more than $1 billion when bitcoin neared the $20,000-per-coin mark. Of course, most folks aren't tossing $11 million into bitcoin. Instead, the average holding tends to be a little over $2,900, according to a November survey from online student loan marketplace LendEDU. Then again, the value of bitcoin has more than doubled since this November survey, suggesting that the average holding today would be closer to $6,000, assuming no one sold.

Historically, the stock market has been the best creator of long-term wealth. Though it's undergone numerous corrections and bear markets, it's still returned an average of 7% per year, inclusive of dividend reinvestment and adjusted for inflation. For most investors, this means a doubling of their invested nest egg about once every decade, which isn't too shabby at all.

That was until cryptocurrencies came along. Last year, the combined market cap of all digital currencies rose from $17.7 billion at the beginning of the year to $613 billion by years' end. For you math-phobes out there, that's a better than 3,300% increase, which might very well be the best single-year performance for any asset class, ever.


More than a third of bitcoin investors will commit blatant tax fraud this year:
However, this great source of profits is also a major source of confusion come tax time. Forget for a moment the fact that more than half of all people have no clue whether or not bitcoin is legal to own in the U.S., and just imagine how little people know about bitcoin's tax status. Capital gains and losses should be (key word there) reported by taxpayers to the Internal Revenue Service (IRS) on Form 8949, even though bitcoin isn't regulated or recognized as legal tender in the United States. But history has shown that most taxpayers aren't doing this.

According to the IRS, just 802 taxpayers reported capital gains or losses on their tax returns in 2015, which is pretty consistent with the number of reporting taxpayers between 2013 and 2014. But according to a recently won court case, far more taxpayers were likely basking in profits and not reporting them. A legal victory against cryptocurrency exchange Coinbase is requiring the exchange to turn over information on 14,355 users who traded at least $20,000 worth of bitcoin between 2013 and 2015. In the process, the IRS made it clear that it was going after crypto tax evaders.

Yet bitcoin investors don't really seem to care, or understand the law for that matter. When LendEDU questioned 564 bitcoin investors in November whether they'd be reporting their capital gains or losses on their 2017 taxes, just 64% affirmed that they would. This means 36% of bitcoin investors plan to knowingly and willingly commit tax fraud by evading capital gains tax in the upcoming tax season.

This capital-gain tax avoidance is even more blatant if these profits were taken in the short-term (defined as holding an investment for 365 days or less). Short-term profits are taxed at the ordinary income-tax rate, which is higher than the long-term capital gains tax rate.