'I feel like I might have accidentally ruined my life:' Tax season is wrapping up and bitcoin investors are freaking out

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• Cryptocurrency exchanges generally don't send customers information about potential tax liabilities.
• That's leaving cryptocurrency investors confused about what they owe the IRS for their holdings.

The bitcoin boom of 2017 minted countless new millionaires, but not everyone who jumped on the bandwagon last year is currently enjoying their spoils.

With the deadline for filing federal taxes in the US right around the corner, cryptocurrency investors who cashed in last year may face a massive tax bill from the Internal Revenue Service.

Investors are required to pay taxes on their cryptocurrency investments if they sold their digital coin holdings at a higher price than they bought them. However, since many cryptocurrency exchanges don't send customers tax documents, many might not even know they have to pay taxes on their coins - or how much.

Perry Woodin, the founder of Node40, a blockchain accounting company, told Business Insider this is a problem impacting a significant number of people.

"Millions of people have a tax liability they don't realize or know how to get the numbers for," Woodin told Business Insider.

One investor shared his story in a Reddit post that went viral:

"Around December 2017, I got caught up in the altcoins frenzy and sold most of my bitcoins (about $120k worth) to buy a bunch of different coins. I didn't know this back then but it looks like I owe income taxes on those trades, which adds up to about $50k if I add up state (California) and federal."

The problem is, the coins the investor swapped his bitcoin for are now only worth $30,000. And he has only an additional $5,000 in savings.

"I feel like I might have accidentally ruined my life because I didn't know about the taxes," the investor concluded.

Woodin told Business Insider he knew a couple that faced a similar situation.

"In this case, they bought Dash real cheap at $7 and then it went to $1,600," Woodin said. "They cashed out to do $100,000 worth of home-renovations and didn't have enough to pay the tax."

At first glance, it might be easy to chalk up these anecdotes as irresponsible behavior, but there are some good reasons why people are confused.

Cryptocurrency exchanges, for the most part, do not send customers tax forms, such as a 1099-DIV, which inform investors how much they made from selling investments during the year. Coinbase, one of the exchanges that does send tax information to customers, only does so if you have more than $20,000 invested with the company.

Without a 1099-DIV form, it's up to the investor to figure out how much they made from selling cryptocurrencies during the year, and how much they'll owe in taxes. The tax rate depends on how long the cryptocurrency was held: If it was less than one year, the investment profit is taxed just like a salary is taxed. For investments held longer than one year, capital gains tax rates apply, which are typically lower but can be as high as 20%.

So what are you to do if you are a crypto investor in a tax-related bind? The bottom-line, according to Gwen Moore, a partner at Johnson Moore, a tax consultancy, is to reach out to the IRS.

"If they have a huge tax bill they can't afford, then they can get into a payment plan," she said. "There are certain programs people can get in to settle with the IRS for taxes if they can't pay."

The IRS offers payment plans at much lower interest rates than paying an unaffordable tax bill with a credit card, for example. The current interest rate is 4%, not including any additional penalties.

The one thing you don't want to do is ignore the bill.

For folks who have started on their taxes and want to figure out how much they might owe, Coinbase recently launched a tax calculator.

"People can take action to find out what their cost basis is, what the potential gain or loss would be," Moore said.

If you filed without mentioning your cryptocurrency investments, it's okay, Moore says, as long as you notify the IRS and explain your situation.

"They have a lot of discretion to distinguish between people who made a mistake and someone who is evading taxes," she said. "Obviously, there is a difference between someone who comes forward, explains their mistake, and someone who looks like they heard about the crackdown, and moved their crypto somewhere else."

Lauren Lyons Cole contributed reporting.

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