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Avoiding the IRS crackdown

All American crypto traders should know that the IRS is gearing up for large compliance campaign (read crackdown) on crypto traders.[1]

The IRS commission said in November 2018, “You think the IRS doesn’t know [who the cryptotraders are]? The IRS will have more information about them than you can possibly imagine.”[2]

Clinton Donnelly has written a book to show traders how to protect themselves. He is a Enrolled Agent with a law degree experienced in defending taxpayers from the IRS at examinations, audits, and appeals.

How does the IRS know who all the American crypto traders are?

During the run-up of prices in 2017, many traders chose not to even report their gains on their tax returns. Others reported some but not all. How much risk do non-reporters and under-reporters face? The short answer is that the IRS pretty much knows who all the U.S. cryptotraders are. I will explain if you sign up for more information.

How will the IRS compliance campaign happen?

We can have a good idea of how it will be done from their past campaigns and official pronouncement. They will be using data analytics. This technique enabled the IRS to bring in 10 times more money in 2018, than in 2017. “We prioritized the use of data in our investigations in fiscal 2018,” said Don Fort, Chief of [IRS Criminal Investigation]. “The future for CI must involve leveraging the vast amount of data we have to help drive case selection and make us more efficient in the critical work that we do. Data analytics is a powerful tool for identifying areas of tax non-compliance.”[3]

Must crypto traders submit anti-money laundering reports?

The law requires taxpayers to submit various reports annually when engaged in financial transaction with non-US persons. Since exchanges anonymously match buyers and seller, the taxpayer must assume the counterparty to his trade is a foreign person.  Barely any crypto traders filed these anti-money laundering reports. The exposure is massive. The IRS knows it. The penalty for non-reporting starts at $10,000.

Can past returns be corrected to protect against the IRS compliance campaign?

There are several tax amnesty procedures available that eliminate penalties when correcting past filing mistakes. However, these options go away once the IRS issues the first letter challenging your past returns. So the time to act is now. The process is surprisingly easy and affordable.

Why hasn’t the IRS begun the crackdown already?

Why doesn’t the IRS not worry about the statute of limitations? It is because under-reporting and non-reporting crypto suspends the statute of limitation protections. They can take as long as they want.

What if I would owe the IRS more money than I have?

This real fear can be mitigated several ways including using like-kind exchange (up until 2018), claiming losses from scams and failed exchanges, reporting mining income and all expenses, amending past returns, structuring multi-year payment plans, or offering a compromise to the IRS.

What can you do?

Click here to get a copy of the e-book!

Clinton Donnelly, LLM
@CryptoTaxFixer
DonnellyTaxLaw.com

Footnotes

[1] https://www.irs.gov/businesses/irs-announces-the-identification-and-selection-of-five-large-business-and-international-compliance-campaigns

[2] https://www.thetaxadviser.com/issues/2019/feb/irs-commissioner-aicpa-national-tax-conference.html

[3] https://www.irs.gov/newsroom/irs-criminal-investigation-releases-fiscal-year-2018-annual-report

Cryptotrader saves $471,000 on Taxes

How a Crypto Client  Saved $471,000!

It is a very common story I hear. An individual has huge gains trading crypto-to-crypto in 2017. In Spring 2018, he asks his accountant if he has to report the trading on his return. The accountant is clueless. The investor knows his return is not being done right.

In this particular case, the clueless accountant extends the return but never follows up with the client.  By 2019, the client is scared, realizing he never filed a tax return for 2017. There’s going to be penalties and interest. It’s going to be bad. He didn’t report his cryptos in 2016 either! What can he do?

Fortunately for him, he found me, the @CryptoTaxFixer.

He had two big problems: the unreported taxable gains and the unreported crypto activities on the anti-money laundering forms which are filed with the tax return.

If we had reported his capital gains as usual for 2016-2018, he would have owed $587,000 in taxes, penalties and interest. Also he would have owed a minimum of $60,000 in late filing penalties for the anti-money laundering forms. An estimated total owed of $647,000.

The solution I proposed was to treat the 2016-2017 gains as Section 1031 like-kind exchanges which defers the taxable event until later. This significantly reduced the 2016-2017 capital gains income which was causing high penalties. Because crypto prices dropped sharply in 2018, the losses offset the gains, saving lots of money.

The second step to the solution was to do a tax amnesty appeal to get a waiver of the late penalties on the anti-money laundering forms. Bottom line, he owed the IRS an estimated $176,000. This is a savings of $471,000. Incredible!

This is why you don’t want just any (or your old) accountant doing your crypto tax return, even if he is a CPA. An excellent tax professional pays for himself.

This client was a big trader. I would estimate that traders with at least $40,000 of gains in 2017 would possible benefit from this treatment. Like kind exchange calculations are very time consuming, so the cost of preparing like kind exchange returns isn’t cheap but the payback can be big.

Some caveats on this story. Starting in 2018, like kind exchange treatment of cryptos is no longer available in the tax code. I’m convinced it is a lawful treatment for crypto-to-crypto trades prior to 2018. As an Enrolled Agent with a law degree, I defend my clients through any IRS challenge right up through the appeals process. Using Section 1031 like-kind exchange doesn’t always reduce tax liability. Each case is different. Filing the anti-money laundering forms late is an automatic $10,000 penalty. Following the proper tax amnesty process is vital, so get help from an experienced professional. I’ve filed over 700 tax amnesty returns with 100% success rate.

Clinton Donnelly, LLM
Enrolled Agent

Schedule a free consultation by clicking on the green schedule button on the top of my webpage, www.donnellytaxlaw.com.

Can I Deduct a Lost Crypto Wallet?

I just talked to a client who had keep over $50,000 in Bitcoins safe on a private wallet. The private wallet is locked with special password. He thought he remembered the password.

He typed in it three times. Each time, he was told it was wrong. Then it permanently locked up never to be opened again. His Bitcoins are now in a cyber wasteland never to be used again. A tragic story., but not uncommon.

Can the loss be taken on the tax return?

The answer is that this type of crypto loss can be taken as an a deduction.

Many people have heard that as a result of the big tax law change in December 2017, casualty and theft losses can no longer be written off unless it is related to a federal disaster zone. Does this apply to a lost wallet? No it doesn’t.

Why is this? In the Internal Revenue Code section 165, deducting a loss is limited to three types of losses by individuals. The first type is a loss incurred in a trade or business. The second is a loss incurred in a transaction entered into for profit. The third type is all other types of losses including casualty and theft losses. The tax law change disallowed deducting the third type of loss. The client had purchased the Bitcoin with the intent of making a profit. Therefore, is was a type two loss and can be deducted from his taxes.

How does the deduction work?

The amount that can be deducted is the adjusted basis or the amount that he paid for the lost coins. Unfortunately, this is not the fair market value of the coins. In short, you can write off what you spent.

You should be prepared to prove that indeed you have lost the password to the wallet and that it is no longer accessible. This may be tricky. In case of audit, these proofs and the worthless wallet should be retain until the statute of limitations on the return expires.

Clinton Donnelly
@CryptoTaxFixer
www.donnellytaxlaw.com

Clinton Donnelly is an Enrolled Agent with a law degree. He solves tax problems for crypto traders. Click the green button on his website to schedule a consultation.

GAO agrees FBAR and Form 8938 are too burdensome for expats.

The Government Accounting Office released a study to Congress acknowledgding that the FBAR and Form 8938 reporting requirements are confusing and burdensome for Americans living abroad.

A 2010 law requires Americans and foreign banks to report more information to IRS about Americans’ foreign assets. Implementing the law, however, has raised some concerns.

For example, close to 75% of taxpayers reporting foreign assets to IRS also reported them separately to Treasury—indicating potential unnecessary duplication.

Also, some Americans living abroad can’t get services from foreign banks that find the law too burdensome.

They recommended changing the laws to harmonize the types of assets reported and to have common minimum reporting thresholds.

They also claim that the IRS has difficulty connecting FATCA data collected from foreign banks with Form 8938 reports from taxpayers. The implementation of GIIN numbering will be improve this significantly.

Read the GAO’s findings here:
https://www.gao.gov/assets/700/698133.pdf

Just What Is Block Chain

You don’t need to know how the blockchain works to use it, but having a basic knowledge allows you to see why it’s considered revolutionary. The blockchain is a digital ledger that can be programmed to record not only financial transactions, but also virtually everything of value.

Information on a blockchain exists as a shared and continually reconciled database. A blockchain database isn’t stored in any single location—the records it keeps are public and easily verifiable. There’s no centralized version for a hacker to corrupt, but it’s accessible to anyone on the internet because it’s hosted on millions of computers simultaneously.

By storing blocks of information that are identical across its network, the blockchain cannot:

  • Be controlled by any single entity.
  • Have any single point of failure.

Blockchain guarantees the validity of a transaction by recording it not only on a main register, but also on a distributed system of registers, all connected through a secure validation mechanism.

This is true because the blockchain network automatically checks in with itself every 10 minutes: a kind of self-auditing ecosystem of digital value. Each group of transactions is referred to as a block. A network of computing nodes makes up the blockchain—each is an administrator, making the network decentralized.

Blockchain’s initial purpose was the development of cryptocurrencies such as Bitcoin—a secure and consistent financial system not under control of any government’s central bank. But that’s only the first of many potential applications. There are a range of other potential adaptations of the blockchain concept that are active or in development.

Anything that happens on the blockchain is a function of the whole network. Some important implications stem from this:

  • A new way to verify transactions, making traditional commerce unnecessary.
  • Stock market trades become almost simultaneous.
  • Types of recordkeeping, like a land registry, could become fully public.

As an example, Bitcoin has no central authority—it’s managed by the network. The forms of mass collaboration this makes possible are just beginning to be investigated:

  • How about international remittances? The World Bank estimates that more than $430 billion in money transfers were sent in 2015.
  • The blockchain potentially cuts out the middleman for these transactions.
  • Transactions online are connected to identity verification. It’s easy to imagine how the blockchain will transform other types of identity management.

And by storing data across its network, the blockchain eliminates the risks that come with data being held centrally. There are no centralized points of vulnerability that computer hackers can exploit.

With the internet, we all rely on the username and password system to protect our identity and assets online. Blockchain’s security methods consist of public and private keys. A public key is a long, randomly generated string of numbers that becomes your user address on the blockchain. Bitcoins sent across the network are recorded to that address. The private key is like a password that gives the owner access to Bitcoin or other digital assets.

The promise is that if you store your data on the blockchain, it’s incorruptible as long as you safeguard your private key. The blockchain gives internet users the ability to create value and authenticate digital information, and the expectation is that it will transform not just financial services, but also many other businesses and industries.

We’re seeing just the beginning.

Key Guidance on Sec. 199 A Deductions

Key Guidance on Sec. 199A Deductions

Breaking news. World news with map backgorund. Breaking news modern concept. TV news design.

The new QBI deduction, created by the 2017 tax reform law, allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.

The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.

The guidance, released today, includes:

  • A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies.
  • A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,
  • A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction
     

The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued.

The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.

The QBI deduction is not available for wage income or for business income earned by a C corporation.

As with many IRS provisions, although the basics look clear, the devil is in the details. Be sure to keep in touch with us to see how these rules and guidance apply to your situation.