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In 2017, bitcoin went from trading at below $1,000 early in the year to a peak of over $19,000 in December, while other virtual currencies also enjoyed gains. For anyone who ignored the common crypto-slang advice to "HODL," to hold on to your investment for dear life, and decided to cash out, those profits are considered income by the IRS. If you sold crypto-coins or used crypto to buy anything in 2017, you probably owe the IRS taxes, says Ryan Losi, a certified public accountant and the executive vice president of Virginia accounting firm PIASCIK. "For Americans there is no free lunch," Losi says. "If you're richer tomorrow than you were today, it is likely you have some tax burden associated with that."

And not paying up can have consequences. If the IRS discovers you under-reported your income when you file your taxes in April, "there is a failure-to-pay penalty of 0.5 percent per month, starting after the month in which it was due," Losi explains. "Then there is a failure-to-pay penalty of 5 percent on top of that." Then, there's interest. To avoid penalties, here's what you need to know about paying taxes on bitcoin. 1. Crypto is on the IRS's radar While the number of people who own virtual currencies isn't certain, leading U.S. cryptocurrency exchange Coinbase had an estimated 11.7 million users at the end of October 2017, according to data compiled by Alistair Milne, a co-founder and chief investment officer of Altana Digital Currency Fund. (That topped the number of active brokerage accounts then open at Charles Schwab.)

But unlike with traditional investments, in which case you're likely to be issued a 1099 form (which is also sent to the IRS) to keep track of your holdings and tax obligations, that isn't necessarily the case with virtual currency. Coinbase will provide 1099 forms to "certain business customers" and "customers that have received at least $20,000 cash for sales of virtual currency related to at least 200 transactions in a calendar year," according to the company's customer support page. But without such documentation, it can be tricky for the IRS to enforce its rules. "[For] now it is difficult for the IRS to really find out on an individual basis whether you reported your virtual currency sales or exchanges," Losi says. Indeed, it appears barely anyone is paying taxes on their crypto-gains. For example, in 2015, only 802 Coinbase users told the IRS about bitcoin gains, despite the exchange having 2.9 million users in December of that year, according to Milne's data.

Recently however, the IRS has taken steps to identify tax-payers who are profiting, but not reporting. In 2016, the IRS summoned records from Coinbase, and a court ruled the company had to disclose information on about 14,000 users who have "either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year," CNBC reports. Even if you aren't a hefty Coinbase user, you're obligated to report, and every U.S. taxpayer can potentially be audited by the IRS. The IRS examined 0.6 percent of the 193 million tax returns filed in fiscal year 2016, or about 1.2 million. 2. You owe taxes if you sold or spent crypto In 2014, the IRS first issued official guidance on how to treat virtual currencies, which outlined that they are considered property.

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Ray
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