Another Internet Bubble Lesson (Pay Your Crypto Taxes)
Those of you with CoinBase accounts have probably noticed this reminder that recently appeared. If you’ve seen it please don’t skip this short story.
In 2000 the internet bubble momentarily generated a huge amount of paper wealth for myself and the other founders of Sonic Foundry. When the dust had settled from the bubble explosion, beyond the obvious loss of value, investment capital, and the growth of the company there was a less obvious outcome that affected me and my fellow co-founders.
As founders of the company we had preferred stock which generated a dividend every year. The dividend was payed either in stock or a discounted amount of cash. Everyone always chose the stock. It was going up! Taking discounted cash didn’t make any sense! At the height of our bubble that stock dividend had significant value, in my case about a million dollars. Sounds great, right? But it quickly turned into a horror story.
Being paid a dividend is a taxable event. The IRS says “hey you just got a million dollars so we’d like you to pay us some taxes on that.” If I’d been paid in dollars, it wouldn’t have been a problem but I’d been paid with stock. As a startup guy, I was worth a lot on paper but other than my salary I didn’t have any additional income. That million dollar stock dividend ended up generating a $300,000 tax bill and that was money I didn’t have. However my “internet bubble paper worth” was high, so banks were happy to lend me the money. The bank was happy, I was happy, and best of all, the IRS was happy.
You can probably guess what happened next. The bubble burst and suddenly that million dollars of stock was worth less than $20K. Unfortunately when these things happen the IRS doesn’t say “Hey you had a bad turn of events would you like this money back?” I was stuck with a $300k debt I had to pay back, plus interest!
Many of you who’ve invested in Crypto this year will owe taxes. This will vary depending on your circumstances but given the run up of crypto you probably have generated taxable events. I’m obviously not a lawyer or an accountant, so if you’ve made significant gains on crypto you should probably ask for their advice.
Things like mining crypto, selling crypto for fiat and potentially selling one crypto for another could be taxable events. Hopefully you’ve either already paid the taxes or set aside enough cash to cover them. You can read the IRS’s primer on how they treat crypto on their website.
If your crypto of choice keeps going up, you can just sell some off, pay the taxes and watch the profits continue to roll in. But I think we can all agree that cryptos tend to exhibit a bit of volatility. And if you have to liquidate during a downturn, things can quickly go from bad to horrible.
I was lucky. I was eventually able to recover. I was able to get a loan to pay the taxes because I did it before the bubble burst. I also happened to have some early advisor shares from nVIDIA I was able to sell. Unfortunately that cost me a lot of upside.
Although no one likes losing upside, there are worse things. You could end up owing taxes on an asset that’s not even worth the amount you owe. Believe me that’s much worse.
