The Crypto Tax Trap: Lessons From A $3M Windfall and A Personal Close Call

When Jonathan Mann, better known as @songadaymann on X, released his 6,000th song earlier this year, it came with a staggering backstory: the highs of a $3 million crypto windfall, the devastation of a $1.1 million tax bill, and a singular piece of digital art, an Autoglyph, that ultimately saved him from financial ruin.

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For those unfamiliar, Jonathan holds the world record for “most consecutive days writing a song” — now spanning 17 years. His milestone 6,000th song, titled Crypto Tax Nightmare, is not only a synth-laced homage to the music videos of his youth, but also a confessional ballad chronicling one of the most financially harrowing chapters of his life.

That sentiment, the haunting question that follows seemingly life-changing gains, resonated with me. While I didn’t experience the same extraordinary circumstances as Jonathan, I lived through my own crypto tax debacle that nearly shattered me.

How I Got Caught In The Crypto Tax Web

A few years ago, I was still relatively new to crypto, coming off the worst of the 2018-2019 bear market. I had just begun to find my footing contributing to multiple early stage crypto teams. When you work with crypto startups, if they have a token, it’s almost certain you will be paid in that native token so I was earning extra income paid in crypto tokens, not in stablecoins, but volatile assets. That’s where things started to go sideways. Like many, I assumed, and in sometimes just basked in my own ignorance that I could hold these tokens until I decided to convert or use them. But the IRS doesn’t see it that way.

The moment you receive income in crypto, it is taxable based on the USD value at the time of receipt, whether you sell or not.

So when I watched the value of those tokens go up in 2020-2021, it was glorious! I felt justified to be doing what we do best in crypto—HODL. However, when these tokens began to plummet in 2022, I found myself in an excruciating bind: I suddenly owed more in taxes than some tokens were worth.

My saving grace was that I began paying some of my tax bill while the market was still earlier in its free fall in April/May 2022. But even then, I had to open multiple DeFi loans and TradFi loans (ie SoFi) just to cover the remainder, loans that would take many years to pay off. By November 2022, I had seen our industry decimated by the collapses of Terra/Luna, 3AC, Celsius, Blockworks, and FTX/Alameda. Just as FTX shut down following reporting of their balance sheet by CoinDesk, I made final payments and committed to a manageable payment plan to finish paying my IRS taxes ($25k) by May 2023.

I am still not ready to share exact numbers from my own journey but what I will share is I started with nothing because I came from nothing. I had maybe $10k saved in 2018 and I put all of it into ETH and BTC DCA’ing while ETH was ~$100-$300 and BTC was $2k-$10k. I was too late to ever “make it” in 2017 and despite notable gains for where I come from, I was still finding my way during the 2020-2021 cycle. But the devastating truth was that whatever I had accumulated was worth exactly what I owed in taxes by November 2022. It was unimaginable to consider all I had worked for was about to disappear in taxes. And then what if selling to pay those taxes triggered a new bill for the following year that I couldn’t pay off?

It was a crypto tax nightmare.

A Common and Costly Mistake

Jonathan's story and my own is a wake up call. Many crypto veterans and newcomers alike still confuse the treatment of income tax versus capital gains. It’s one of the most common pitfalls.

Let’s break it down with Jonathan’s example:

• He earned $3 million worth of ETH selling his song catalogue as NFTs.

• He lives in the U.S., so he owes federal income taxes (not capital gains) on that amount.

• Assuming the highest bracket (37% for married filing jointly), that’s about $1.1 million in taxes.

But ETH is volatile. If the price crashes before you sell, and your ETH is now only worth $1.1M or less, too bad! The IRS still wants the original $1.1M in USD. They don’t care if your ETH lost value. They tax you like you were paid in USD and then chose to invest in ETH.

It’s the same logic that turns newly earned crypto income into a ticking time bomb.

HODL At Your Own Risk

Crypto culture worships the “HODL” mentality. And long-term holding has helped many to build generational wealth. But holding your income in volatile assets is dangerous.

These days, when I get paid in tokens, even airdrops, I almost always sell immediately to cover taxes. I still believe in staying as long as I can in crypto, but I’ve learned the hard way that protecting yourself from downside is not weakness. It’s survival.

Because when the market inevitably collapses, as it did in 2022 with Terra/Luna and FTX, your paper profits can evaporate — but your tax bill remains very real.

A Real-World Example: BTC in 2022

Let’s say a client paid you $100k in BTC over several months in 2022. In February, BTC was $45k. By December, it was down to $16k. Your net BTC might now be worth $35k.

But you still owe taxes based on the original USD value of the income: $100k. If you're in the 32% tax bracket, you owe $32k.

You now have $35k in BTC… but owe $32k in taxes… for work you already did. And that’s assuming you didn’t touch any of that BTC for rent, groceries, or life. See the trap?

Final Thoughts: “Making It” vs. “Making It Work”

Jonathan’s video “Crypto Tax Nightmare” is full of nods to 80s and 90s music videos, symbols of a dream he held as a kid: to have a video on MTV, to “make it.” But the irony is sharp: when he finally felt like he had “made it” financially, that very moment set off the crisis that followed.

That’s the illusion so many of us chase in crypto. But in his words: “There’s no such thing as ‘making it.’ Rather, I am ‘making it’ every single day I sit down to write my song.”

If you want to play the long game in crypto, do yourself a favor: commit yourself to learning the difference between income and capital gains taxes in crypto. Plan ahead. And sell your tokens to cover taxes the moment you triger them.

This can happen to you.

😳

Follow-Up: $TAXES Memecoin Launch on Base and Retro Game

Visit Jonathan’s accompanying website for his 6000th song, a clever homage to 80s/90s music references. The website celebrates the song and the story behind his journey, along with a new memecoin (TAXES) he’s launching on Base (not financial advice) with the ongoing presale ending today June 9th.

For over 8 years, I’ve work with TokenTax to do my crypto taxes. This is not intended as an ad for TokenTax but while we’re on the topic, I’d be remiss not to mention how grateful I’ve been for their services in helping me to navigate the most challenging analysis to understand what I owe in taxes.

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