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Scary IRS Letters Sent to Cryptocurrency Investors! Is there Relief in Sight? Hint: YES

Scary IRS letters

The dread of opening an IRS letter to find out if you owe money, or under audit triggers anxiety-like no other.  Anyone who has ever received such a letter knows this feeling.  

Did you know that recently the IRS sent out thousands of warning letters to cryptocurrency investors to encourage them to “come clean” and amend past filings or else?! Tax professionals are encouraging those who received letters not to ignore them. The Internal Revenue Service takes tax avoidance seriously, whether knowingly or unknowingly, and will be stepping up efforts to collect taxes from cryptocurrency investors.  Keep in mind, the IRS levies harsher penalties on those they contact versus those that come forward on their own. At the end of the day, it is your responsibility to know and comply with all regulations.

The IRS doesn’t mess around

Many early enthusiasts believed that the anonymity of crypto meant they didn’t need to report their capital gains to the IRS, but that’s simply not the case.  Let’s not forget the IRS has already subpoenaed client records from Coinbase. And last year, they announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of cryptocurrency.  They have even licensed the software of Chainalysis, to identify owners of digital wallets. 

If you really want to see how serious the IRS takes collecting taxes, go ahead and google IRS tax cheats.  You will find an endless list of famous names that have had run-ins with the IRS. Penalties range from late fees to seizure of property and even jail time. Cough, Wesley Snipes. The phrase ‘Nothing is certain in life but death and taxes’ wasn’t just pulled out of the blue one day; it was earned.  

There must be a better way

If you’re thinking there has to be a better way to invest in cryptocurrency without the fear of the IRS coming after you, you’re right.  Any investment made in an IRA (Individual Retirement Account) is sheltered from taxable events. That means you can buy and sell at will without the anxiety of tracking or reporting trades.  Also, when investing through an IRA, all of your gains are tax-deferred or tax-free, depending on the type of IRA. IRAs have been utilized to build long-term wealth for decades, and now you can invest in cryptocurrency using this great financial vehicle.

You may already have a qualified account

For those who already have an IRA or an old retirement account from a past employer like a 401K, 403b, TSP or 457, you can rollover those accounts into a new IRA without creating a taxable event or penalties.  For those who do not have an existing account or do not want to move funds from their existing account, you can open a new IRA and fund it with a contribution that may offer even more tax benefits. For 2019, you can contribute up to $6,000 if you are under 50 years old or up to $7,000 if you are over 50 years old.

No current retirement account, NO Problem!

For those who are already trading cryptocurrency on exchanges with after-tax dollars, this is a no brainer.  Do exactly what you are already doing but in an IRA! Think about it, trade as much as you want and instead of paying a large portion of your gains to the IRS every year, they stay in your account, which gives you more to work with to continue growing your wealth. Your gains are compounding year over year.

Roth IRA = Tax-free

Think about this; if you open a Roth IRA, your gains don’t only compound year over year, they are also 100% tax-free, as long as you don’t pull funds out (distribution) until the age of 59 ½.  Let me repeat that, 100% TAX-FREE! And yes, it’s all legal.

Traditional IRA = Tax-deferred

With a Traditional IRA, your gains are tax-deferred until you pull funds out, in which case the distribution is taxed as income. Usually, when an existing employer plan is rolled over to an IRA, it goes into a Traditional IRA to maintain the same tax-deferred status the funds had in the previous account. It is possible to convert a Traditional IRA to a Roth IRA, this will create a taxable event, so it’s always a good idea to speak to a tax professional who is familiar with your situation.

Either type of IRA is a great way to build long-term wealth and it keeps the IRS off your back.

You’re not locked in forever

With IRAs, you always have options of what to invest in and what firm you want to invest through.  You already know you can buy and sell your investments within an IRA without creating taxable events.  In addition, you can also transfer funds from one IRA provider to another without any taxable events or penalties.  Not happy with your current provider? Fees are too high? Bad customer service? It may be time to move your hard-earned money to a provider that better meets your needs.

So Let’s Review

You like investing in Cryptocurrency. Check. You don’t like paying a large portion of your gains to the IRS.  Check.  You don’t want to have to track and report every trade. Check. You want to one day have enough money saved to retire. Check. You don’t want to receive scary letters in your mailbox from the IRS. Check. 

Yep, it’s official; you need to start an IRA!

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