Reddit user says he owes the IRS $50,000 thanks to bitcoin — here’s how to avoid a surprise tax bill

The rise and fall of bitcoin during recent months has been eye-popping. The digital asset’s price shot from below $1,000 at the beginning of 2017 to over $19,000 in December, before plummeting in early 2018 to close at $8,630.65 on Monday, according to CoinMarketCap.com.

But investors who cashed out around the height of the frenzy were left with a big tax bill. Without advance planning, it was an expensive shock to some.

In fact, trading cryptocurrencies reportedly left one Reddit user with a $50,000 debt to the IRS, which he says he’s unable to pay.

“I feel like I might have accidentally ruined my life because I didn’t know about the taxes,” Reddit user Thoway, who says he earns $47,000 a year as an office assistant, posted March 14.

Thoway says he first got involved with cryptocurrency in the beginning of 2017 and bought eight bitcoin for $7,200. By December of last year, says Thoway, that initial investment soared and he decided to cash out.

Since the IRS views cryptocurrency as property — not currency — that sale triggered a “taxable event,” leaving Thoway obligated to pay taxes on the appreciation of his investment. The income tax he owes, “adds up to about $50,000 if I add up state (California) and federal,” according to the post.

Unfortunately for Thoway, it appears he didn’t set aside any money to pay those taxes. In fact, he writes that he then invested his windfall into other cryptocurrencies.

“I got caught up in the alt-coins frenzy,” he wrote, referring to alternative digital coins like litecoin or ethereum, “and sold most of my bitcoins (about $120k worth) to buy a bunch of different coins.”

Many cryptocurrencies have since fallen sharply, leaving Thoway too broke to pay the tax bill. “I added up my alt-coins and I only have like $30,000 worth. I only have about $5k in other savings,” he writes.

Thoway did not respond to CNBC Make It’s requests for comment.

Thoway’s mistake is an expensive lesson to learn, says Ryan Losi, a certified public accountant and the executive vice president of Virginia based accounting firm Piascik, but not an uncommon one.

“[If] you’ve come into a large amount of wealth … by having an asset appreciate that you acquired at a low value, and you think you do not have large tax consequences, you’re fooling yourself,” he tells CNBC Make It

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