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I invested 18K USD in alt coins mostly using my USD to buy bitcoin since the beginning of the year.

I managed to take out my capital of 18K. And my current holdings were at 17K USD worth of BTC 3 weeks ago when I bought some other coins which have become 40K USD worth of BTC now.

How much tax should I pay? BitcoinTax calculated a ridiculous figure saying I must pay $25k USD as taxes!

I lost about 20k USD in an alt coin called DGB which I bought a ton at a high when bitcoin was at 2.8k and sold it all for 1/10th of the original price. What should I do?

  • Based on the use of USD in the question, can we assume that the country is the United States? – mhoran_psprep Dec 1 '17 at 11:22
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    We'd have to know what State you live in and what tax rate you pay. But if, for example, you have lots of other income and live in California, $13.5k to $21k would be about right. It's a bit complicated because you may have long term and short term profits and losses and you may wind up with losses you have to carry over. Get a tax professional if you don't want to sort it all out yourself. – David Schwartz Dec 1 '17 at 12:03
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    I think the maximum possible tax rate in the United States is 52.9% (Federal plus State). On a $40K gain, that would be $21K. I don't see how you could get $25k. – David Schwartz Dec 1 '17 at 12:05
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    we don't now what the gains are. Some were bought, and some were sold (but we don't know their price), some unspecified amount were purchased 3 weeks ago. and the 17K left over from before plus the new purchases are now worth 40K. – mhoran_psprep Dec 1 '17 at 13:14
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    I don't understand the close votes. This is clearly a personal finance related tax question, not a business accounting question. It's not a terribly good question, but the close votes make no sense. – Joe Dec 1 '17 at 15:34
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You're a bit oblique as to the numbers, but the implications is that you bought 18k worth, then sold about half your holding and got 18k back. That would mean that the BTC you sold represents ~9k of what you put in, which means that you have realized ~9k in profit. However, you also have a 20k loss from DGB. You can't claim negative income, so you can use only 9k of that loss to offset your taxes. You should look into whether you can carry that loss forward. If not, one tactic would be to sell enough of your remaining coins to realize a total profit of 20k. If you want to still the coins, you can buy it back again and have an increased basis.

The $25k tax figure from BitcoinTax likely was based on how much you would owe if you sold all of your BTC, but you don't owe taxes if you don't sell. You apparently have a realized profit of 9k and unrealized 8k from the original BTC, and an unrealized profit from the other coins of 40k minus whatever you paid for them.

Also, the IRS classifies BTC as a capital asset, so if you hold it for more than a year, the income is long-term capital gains.

EDIT: David Schwartz brings up a good point that buying the coins back can be problematic, so you probably should discuss that with a tax adviser if you're interested in pursuing it.

  • For US federal tax you can report negative total income in some cases (search 'net operating loss') but you cannot take a (net) capital loss over $3k; anything beyond that you carry-forward to the subsequent year(s). State tax (if any) may differ and OP didn't identify state. Notice 14-21 allows all 'convertible virtual currency' (not only Bitcoin) as a capital asset, and yes any capital gain realized after holding more than a year is longterm which is taxed at lower rates. – dave_thompson_085 Dec 3 '17 at 8:01
  • You can report negative income at intermediate steps, but your total taxable income is never negative; you can't claim negative income tax. – Acccumulation Dec 3 '17 at 17:09
  • "If you want to still the coins, you can buy it back again and have an increased basis." Do not do this unless you know what you're doing. Even if the wash sale rule does not apply, the economic substance doctrine applies. You can't perform two transactions that cancel each other out just to reduce your taxes. – David Schwartz Dec 4 '17 at 9:38

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