Learning Center for Tax and Financial Insights

Article Highlights:How Cryptocurrency is Treated for Tax PurposesCapital AssetWho Keeps Track of Cryptocurrency Ownership and TransactionsHow Many Cryptocurrencies Are There? What Is Cryptocurrency Mining?What Is a Cryptocurrency “Hard Fork”?Why Is Cryptocurrency Appealing to Some?How Is the Value of Cryptocurrency Determined?Are Cryptocurrencies Good Investments?Virtual Currency and 1031 ExchangesFirst In – First Out (FIFO)Foreign Currency TransactionsForeign Bank and Financial Account (FBAR) ReportingPayments To EmployeesPayments To Independent ContractorsBackup WithholdingCharitable Donations of CryptocurrencyIRS Compliance CampaignIf you have purchased, owned, sold, gifted, made purchases with, or used cryptocurrency in business transactions, there are certain tax issues you need to know about. Unfortunately, there are some unanswered questions and little specific guidance offered by the IRS other than in Notice 2014-21 and Revenue Ruling 2019-24. This article includes the guidance from the Notice as well as general tax principles that apply. One of the big issues of cryptocurrency is how it is treated for tax purposes. The IRS says that it is property, so that every time it is traded, sold, or used as money in a transaction, it is treated much the same way as a stock transaction would be, meaning the gain or loss over the amount of its original purchase cost must be determined and reported on the owner’s income tax return. That treatment applies for each transaction every time cryptocurrency is sold or used as money in a transaction, resulting in a major bookkeeping task for those that use cryptocurrency frequently. Example A: Taxpayer buys Bitcoin (BTC) so he can make online purchases without the need for a credit card. He buys a partial BTC for $2,425 and later uses it to buy goods worth $2,500 (let’s say the partial BTC was trading at $2,500 at the time he purchased the goods). He has a $75 ($2,500 – $2,425) reportable capital gain. This is the same result that would have occurred if he had sold the BTC at the time of the purchase and used cash to purchase the goods. This example points to the complicated record-keeping requirement for tracking BTC’s basis. Since this transaction was personal in nature, no loss would be allowed if the value of BTC had been less than $2,425 at the time the goods were purchased. Of course, if the taxpayer in this example only sold a fraction of his Bitcoin – say enough to cover a $500 purchase – the gain would only be $15: $500/$2500 = .2 x 2425 = 485; 500 – 485 = 15.On the bright side, for most individuals, cryptocurrency is generally treated as a capital asset, so any gain is a capital gain, and if the asset is held for more than a year, any gain will be taxed at the more favorable long-term capital gains rates. If the cryptocurrency is being held as an investment and the sale results in a loss, then the loss may be deductible. Capital losses first offset capital gains during the year, and if a loss remains, taxpayers are allowed a $3,000-per-year loss deduction against other income, with a carryover to the succeeding year(s) if the net loss exceeds $3,000. If you don’t understand how cryptocurrencies function here is a brief explanation. Who Keeps Track of Cryptocurrency Ownership and Transactions? – Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system and provides seamless peer-to-peer transactions around the world. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Those who maintain these digital ledgers are referred to as miners. How Many Cryptocurrencies Are There? - There are currently over 10,000 different cryptocurrencies traded publicly. The total value of all cryptocurrencies in mid-July 2021, was approximately $1.4 trillion. This was down from an April 2021 high of $2.2 trillion. This is evidence of the volatility of cryptocurrency. What Is Cryptocurrency Mining? - Mining is the process by which new blocks of cryptocurrency are inserted into circulation and the way that new transactions are confirmed by the network. Mining is a critical component of the maintenance and development of the blockchain ledger and requires sophisticated hardware that solves extremely complex math problems. The computer that finds the solution to the problem is awarded the next block (files where data pertaining to the cryptocurrency network are permanently recorded) and the process begins again. Miners are rewarded for their efforts in cryptocurrency.For tax purposes the IRS in their guidance have determined that miners are operating a trade or business and the value of the cryptocurrency earned (determined in U.S. dollars at the time of the transaction) is included in the gross income of that business. The business’ profit is treated the same as it is for any other business – taxed as ordinary income and subject to self-employment tax.Example - An individual mines one Bitcoin in 2020. On the day it was mined, the market price of a Bitcoin was $10,000. The miner has $10,000 of business income in 2020 subject to both income tax and self-employment tax. Going forward, the basis in that Bitcoin is $10,000. If the miner later sells it for $12,000, there is a taxable capital gain of $2,000 ($12,000 − $10,000).What Is a Cryptocurrency “Hard Fork”? – You may have heard the term “hard fork” associated with cryptocurrency and wonder what it means. A hard fork occurs when there is a split in a cryptocurrency’s blockchain. Bitcoin had a hard fork in its blockchain on August 1, 2017, dividing into two separate coins: Bitcoin and Bitcoin Cash. Each holder of a Bitcoin unit was entitled to one Bitcoin Cash unit. Similarly, Litecoin, the fifth-largest cryptocurrency, had a hard fork— Litecoin Cash—in February 2018. In October 2019 the IRS released cryptocurrency guidance (Revenue Ruling 2019-24) that explains that a taxpayer:o Does not have gross income from a hard fork of the taxpayer's cryptocurrency if the taxpayer does not receive units of a new cryptocurrency; ando Has ordinary income as a result of an airdrop of a new cryptocurrency following a hard fork if the taxpayer receives units of the new cryptocurrency. (An airdrop is a distribution of cryptocurrency to multiple taxpayers’ distributed ledger addresses.)According to the IRS, taxpayers who received Bitcoin Cash as a result of the 8/1/2017 Bitcoin hard fork received ordinary income because the taxpayers had an “accession to wealth”. Further, the date of receipt and fair market value to be included in income was dependent on when the taxpayer obtained dominion and control over the Bitcoin Cash.Why Is Cryptocurrency Appealing to Some? Cryptocurrencies appeal to their supporters for a variety of reasons. o Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable. o Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation.o Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems. o Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money. How is the Value of Cryptocurrency Determined? - Unlike corporate stocks whose values are based on current earnings and the potential for growth, cryptocurrency values are based on what a willing buyer is willing to pay a willing selling. Using Bitcoin as an example you can see the volatility associated with this most popular cryptocurrency.Are Cryptocurrencies Good Investments? That depends upon whom you talk to. Some cryptocurrency investors have made substantial amounts with their investments while others have lost substantial amounts. Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone must pay more for the currency than you did. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation. Some notable voices in the investment community have advised would-be investors to steer clear of cryptocurrencies. Warren Buffett once compared Bitcoin to paper checks: “It's a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?"

You undoubtedly keep a very close watch on the money coming into your business. You record payments as soon as they come in and deposit them in your company’s bank account. But are you as careful about your purchases?It’s easy to go out to lunch with a client and forget to save the receipt. You figure it’s not that much money, anyway. Or you pick up a ream of printing paper and a cartridge at the office supply store and neglect to record the purchase. When you disregard even small expenses, you can have two problems. One, your books won’t be accurate. And two, you never know how an extra $42.21 under Meals and Entertainment might affect your income taxes.QuickBooks Online provides two ways to enter expenses. You can create a record on the site itself. Or you can snap a photo with your phone using the QuickBooks Online mobile app to document the money spent. Here’s how these two methods work.Documenting At Your DeskLet’s say you just had lunch with a vendor to discuss some products you’re planning to buy for a project you’re doing for a customer. You charged it to your company credit card, which you track in QuickBooks Online. You still have to enter it as an expense on the site so that when your credit card statement comes, you can match the credit card transaction to the expense you recorded.Hover over Expenses in the navigation toolbar and click on Expenses. Click the down arrow in the New transaction button and select Expense. Fill in the fields at the top of the screen with details like Payee, Payment date, and any Tags you want to specify. Under Category details, select the correct category from the drop-down list and enter a Description and Amount. QuickBooks Online allows you to thoroughly document expenses. You can attach a picture of a receipt if you’d like.Since you’re going to bill this to the customer as a part of your project fee, click in the Billable box to create a checkmark. Select the Customer/Project. Add a Memo to remind yourself of the reason for the lunch (very important!) and attach a photo of the receipt if you take one. Click Save. Your record of the lunch will now appear on the Expense Transactions screen. It will also show up in the Expenses by Vendor Summary and Unbilled Charges reports, among others.Recording on the RoadIn the example we just went through, attaching a photo of the receipt was the last thing we did to record an expense in QuickBooks Online. There’s another way to document a purchase that starts with a photo of a receipt and should save you a bit of data entry: using the QuickBooks Online mobile app. The app uses Optical Character Recognition (OCR) to “read” the receipt and transfer some of its data to fields on an expense record. (If you haven’t installed the QBO app on your smartphone, you should. You can do a lot of your accounting work that synchronizes automatically with QBO. It’s free, too.)

Here are five things that happened this past month that affect your business.1) Higher corporate rate appears to fall out of economic packageBiden’s advisers said that they are pursuing a range of ideas that could still raise substantial sums of money from corporations and the rich, including a tax on billionaires’ assetsFull story via the Washington Post Why this is important for your business:It appears policy makers are going after increasing taxes on the super rich versus many small business owners with their new proposals. 2) Returning to the office can be stressful for many team members. Make it easier by following these 5 tips. The Covid-19 pandemic and the Delta variant have postponed many office reponeings. For many of your employees, the fear and delays have created added stress. A seasoned therapist shares her top five strategies for making the return to work as stress-free as possible.Insight via CNBC Why this is important for your business:Businesses nationwide are struggling with retention and finding new hires. Make sure you take care of your current team first. 3) Pushback to proposed $600 bank reporting causes the new threshold to increase to $10,000 in annual deposits or withdrawalsThe revised version of the bank reporting proposal will also weaken its scope by exempting all wage income from counting toward the $10,000 threshold withdrawal, intending to ensure it applies to only larger account holders.

A new legislation has been proposed that could limit the ability of high-income earners to take advantage of Roth IRA conversions. Watch this video for a detailed explanation of the proposed legislation and how it might affect you.

Article Highlights:Tax Compliance Hard-to-Trace Income Sources Two-Tiered Compliance Bank Transaction Reporting Threshold Tax-compliance rates in the United States are based, in large part, on how taxpayers accrue income. Those who receive income that is reported by a third-party source, such as wage earners, exhibit near-perfect compliance rates on their salaries – since the payer of the income also reports that income as a deduction, such as the employer deducting wages as a business expense and reporting the wages on a W-2, a copy of which goes to the IRS.By contrast, taxpayers who accrue income in hard-to-trace ways exhibit much lower rates of compliance, as no third-party source reports the income to tax authorities. Instead, some of these taxpayers take advantage of the fact that certain income streams are hidden from the IRS, with no information that the IRS can use to detect noncompliance.Higher-income taxpayers disproportionately accrue less-visible income streams. This tax-compliance divergence means that low- and middle-income taxpayers have higher compliance rates, while upper-income taxpayers likely have higher evasion rates. The Department of the Treasury estimates that the cost of tax evasion among the top 1 percent of taxpayers exceeds $160 billion a year.The Biden administration’s efforts to ferret out taxpayers who are not reporting all of their income – and thus are escaping taxation – originally included the idea to require all financial institutions – including banks, Wall Street brokerage firms, credit unions, and private lenders – to report consumers’ account transactions totaling $600 or more annually. This would be done by including two new boxes on the applicable annual 1099 form: one would report deposits into the account, and the other would report the withdrawals.

Article Highlights:Planning for a Child’s Post-Secondary EducationTax-Favored PlansTax-Free EarningsCoverdell AccountsQualified Tuition PlansHave Others ContributeGift Tax IssuesTuition GiftsA common question among parents is, “How might I save for a child’s post-secondary education in a tax beneficial way?” The answer depends on how much the education is expected to cost and how much time is left until the child heads off to college or a university or enters an apprenticeship program. The amount of funds that will be required will depend upon whether your child will be attending a local college, attending a local college and then transferring into a university, going straight to a university, or beginning an apprentice program. If the child will be attending college or an apprenticeship locally, you generally only need to be concerned about tuition, books, and other class materials, and the child can live at home, whereas the child attending a university, unless it is local, will add housing and food costs on top of substantially higher university tuition. Another factor is whether the student will leave school after obtaining a bachelor’s degree or will be doing graduate studies for an advanced degree. When the time comes, your child may qualify for a scholarship or grant, but you can’t depend on that when working out a college savings plan. The federal tax code has two beneficial savings plans to use. Neither plan provides a tax benefit to making the original contributions. The benefit is that growth due to appreciation of the investments, if any, and earnings (dividends and interest) are tax-free when withdrawn for qualified education expenses. Thus, the sooner each plan is started, the better, because it will have more years to grow in value. Both savings plans allow the funds to be used for kindergarten education and above. However, these plans provide tax-free accumulation, and the more the funds are used for expenses at lower levels of education, the less tax benefits they will provide. Careful consideration should be given to using these savings plans for anything other than post-secondary education. More tax benefits will be gained by front-loading the contributions and thus having a larger amount for which the growth and earnings can be compounded. You should also be aware that anyone, not just you, can make a contribution to the child’s college savings plans. So if your child has any well-heeled grandparents, other relatives, or friends who would like to help, they can also contribute. The two savings plans currently available for college savings are the Coverdell Education Savings Account and the Qualified Tuition Plan, most commonly referred to as a Sec. 529 plan (529 denotes the section of the tax code that governs it). Coverdell Education Savings Account – This type of plan only allows up to $2,000 in contributions per year, which generally rules it out as a practical method for college savings, other than as a supplement to other means of saving.