Kirk Phillips is an entrepreneur, certified public accountant (CPA) and author of “The Ultimate Bitcoin Business Guide: For Entrepreneurs & Business Advisors.”
The following article is an exclusive contribution to CoinDesk’s Crypto and Taxes 2018 series.
Perhaps you’re finding out that some crypto you received at its highest historical price is taxed as ordinary income and now it’s worth 30 percent of its former self.
For example, you got paid in Xcoin on the date of its $32 historical high, then the floor dropped out of the market, the price slid to $9 and you continued to HODL. Then you sell all your Xcoin at $9 to cover the tax and end up back at zero.
These situations are not for the faint of heart.
Extensions and payments
Payments have to be timely to avoid penalties and interest, regardless of whether you file on time or extend your return.
Penalties as friends
Generally speaking, if you made estimated tax payments for 2017 equal to or greater than your 2016 tax, then you’re in the safe harbor for that big tax payment on your once-in-a-lifetime gains until the April deadline.
For example, if your 2016 tax was $30,000 and you estimate 2017 taxes at $150,000, you should have paid 2017 estimated taxes of at least $30,000, which leaves you needing to pay $120,000 on the April due date.
But what if you can’t pay or don’t want to pay the tax at the moment penalties and interest start accruing?
This could be a strange-but-true tax strategy where you end up with more resources rather than less. Penalties and interest are seen as a taboo paradigm, but sometimes they can be your friend.
Individuals can generally get an installment agreement for a tax liability of $50,000 or less, including penalties and interest, for up to 72 months, no questions asked.
Businesses can get a similar arrangement for $25,000 or less. Anything over those amounts requires you to go under the IRS microscope by filing additional paperwork.
In this scenario, you’ll have paid $3,500 in penalties and interest, but you benefited from $65,000 of appreciation by leveraging the IRS gift of installment payments.
In addition, liquidating any position in a hurry, crypto or otherwise, is not a good investment strategy, and an installment agreement buys you time to systematically liquidate – like dollar-cost averaging in reverse.
You will also likely end up with more resources using this method rather than an all-at-once liquidation near the tax deadline.
There’s still risk
Keep in mind that instead of a sustained crypto market rebound, the opposite could happen and your portfolio could tank further, putting you in a worse position.
It’s a game of hedging and managing resources. Die-hard crypto enthusiasts already know this well.
Tightrope image via Shutterstock
The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.