Short on Cash to Pay Crypto Taxes - Discussion of Alternative Payment Options?

This article discusses a few helpful tips/resources for U.S. citizens coming up short to pay the IRS this tax season as a result of their 2017 crypto gains.

The Issue

In the U.S., it has been reported in the media that crypto investors are struggling with paying taxes on crypto gains. Presumably, U.S. citizens realized taxable gains from trading between digital currencies or mining currencies, without cashing out into USD. In early 2018, there was a significant decline in the cryptocurrency market prices, thus the value of the crypto holdings remaining was barely enough to cover the taxes.

The conundrum can be summed up as having income from non-cash sources without enough USD to cover tax obligations.

This used to be a problem that only applied to executive of large companies receiving stock based compensation. One such as example is known as the "ISO" tax trap. Here is an example article discussing the issue:

https://mayflowercapital.com/amt-iso-tax-trap-is-back-independent-financial-advice/

This article will discuss briefly a few available IRS payment options.

When a U.S. Taxpayer Can't Pay

Step 1 - Get Help

First, consult a reputable tax advisor. If the taxpayer has already prepared a return themselves, he/she can request the tax advisor independently prepare the tax return, making sure the expected amount due is accurate in the first place.

Note - It is advisable to retain a tax expert even if the individual is expecting a refund, due to the complicated tax law in the U.S.

Step 2 - Review possible periodic payment & other opportunities

Here are some of the available options when taxes are due but the taxpayer can't pay (there may be more options not covered by this very brief article, which is why contacting a tax advisor is recommended):

Note - these are not guaranteed options, some requests could be rejected, and the options could result in the assessment of interest/penalties/fees even if approved - consult an advisor for the best options

• Apply for an installment plan to pay on a monthly basis if qualified https://www.irs.gov/payments/online-payment-agreement-application
• Consider qualifications for an "offer in compromise" which can settle the tax debt for less than the amount owed based on qualifications/approval https://www.irs.gov/payments/offer-in-compromise
• Apply for collection delay if qualified https://www.irs.gov/businesses/small-businesses-self-employed/temporarily-delay-the-collection-process
• In some cases it may be feasible to contact the taxpayer advocate for more information/ideas/assistance https://taxpayeradvocate.irs.gov/get-help/i-can-t-pay-my-taxes

Step 3 - Consider the impact in States (New York, California, etc.)

Although the IRS has payment plans, not all States may have the same plans/terms (if any at all). An individual should contact the department of revenue in the state(s) where he/she files and consult his/her tax advisor to determine which options for installment payments could be available (if any).

Closing Thoughts

In the U.S., individual "wage earners" are usually dependent on receipt of a W-2 with tax withholding to cover most of the IRS/State tax obligations (unless the individual is self employed or with significant investment income). However, with crypto gains in 2017, many "wage earners" are caught in the tax trap that large company executives face with stock awards. The good news is there are payment options with the IRS for individuals who take appropriate and timely action, on a proactive basis.

For future reference, everyone should be aware the requirement to pay U.S. federal estimated taxes is a quarterly requirement. U.S. individual taxpayers should be paying according to the IRS due dates (see instructions for Form 1040-ES) over the course of realizing/recognizing the gains for U.S. tax purposes (not simply holding onto it and paying at April 15th) https://www.irs.gov/pub/irs-pdf/f1040es.pdf.

Picture Credit https://pixabay.com/en/users/stevepb-282134/

Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.