COVID-19 Alert: The Silver Linings This Tax Season

Learn about the COVID-19 precautions we’re taking and some of the latest news and tips for enduring the pandemic and saving you money on your taxes.

Right now, times are uncertain with the spread of COVID-19.  

Unpredictable emotions are running high, with massive changes forced on your everyday routines due to the Coronavirus. 

But the human race is resilient and we are in this together as a global community.  

In times like this, when things seem rather bleak, there is always a silver lining to be found.  

We look forward to doing our part at Donnelly Tax Law to help you see those good things this tax season.

We know this year will be like no other and the last thing we want to add to your worry is interruptions to completing your taxes.  

So, while we all learn to deal with this new COVID-19 pandemic together, we want to let you know you can continue to count on your tax family here at Donnelly Tax Law to get you through this trying time.

Practices That Make Us Strong During COVID-19

COVID-19 world map

We are putting your safety above all else in the upcoming weeks.

As the COVID-19 pandemic forces changes in our everyday routines, our priority at Donnelly Tax Law is to ensure the safety of our staff and to solve the tax concerns of our customers.

Donnelly Tax Law was built intentionally for a robust operation that is resilient to virus threats, both medical and electronic.

Our work will not be slowed down by the pandemic. Even in normal times, we automatically file extensions for our clients so that the April 15th deadline is extended until October 15th. Read further for more information about the filing and payment deadlines being extended by the IRS. 

Donnelly Tax Law is a team of remote workers and therefore we are not exposed to the health risks of a typical shared physical office. We will continue to work on your behalf, even with regional lockdowns.

Precautions We Are Taking During COVID-19

COVID-19 face masks

We are implementing quarantine procedures for deliveries we receive. This safety measure will add a couple of days to the paper return filing procedure, but it will keep us working happily and healthily on your returns.

  • All of our systems and data are cloud-based on highly-secure systems. 
  • All data is encrypted. 
  • All of our systems require two-factor authentication for extra security. 

We are in communication with our vendors to make sure all critical systems remain available. We do not expect any unplanned outages.

COVID-19 Resources and How to Save A Lot Of Money With Your Tax Returns

We are still working hard for you! Donnelly Tax Law has a staff of eight people. We have always worked remotely, so the pandemic has not disturbed our business processes.

We also have a staff backup strategy, so that if any team member, including myself, needs to take sick leave, we have a backup so the work can continue.

Save 20% By Paying Your Invoice With Bitcoin

Bitcoin

From now until April 15th, we are offering a 20% discount to current and future clients for any portion of your invoice that you pay or prepay with Bitcoin. 

Our team is standing by to get you more details on how to take advantage of that special pricing.  

Don’t have any Bitcoin? Start an account at Coinbase or Kraken.

Due To COVID-19, IRS Delay Filing And Paying By Three Months

anti-money laundering

To help cope with the COVID-19 Coronavirus, the IRS has delayed payments and filing by three months. July 15th is now the new due date for filing individual tax returns and making the final payment on 2019 taxes. There is no penalty for extra interest because of the three-month delay. We already automatically extend the filing deadline to October 15th for all of our customers. 

The good news is that now there is extra time to pay!

If you are a client and your tax payment is scheduled already for auto-debit and you want to delay it, you will need to cancel the debit following the instructions in this link.

READ MORE: Tax Filing Deadline Extended To July 15th Due To COVID-19

Making The Most Of The COVID-19 Isolation

don't give up sign

If you are part of our tax community, you can take advantage of the extra free time to finish gathering all your tax documents and crypto records. 

Once completed, upload them to your secure ShareFile folders and let our client manager know so we can proceed with preparing your taxes.  

You can also use this time to learn more about US expat taxes and cryptocurrency taxes with the various ebooks I’ve written about each topic. Visit our online ebook store and discover additional crypto tax tools at our site CryptoTaxAudit.com.  

Learn about other important COVID-19 news from our blog. If you haven’t already, you can subscribe to our newsletter so you get notified of our latest posts.

READ MORE: Coronavirus Relief Package Signed Into Law – More To Come

Clinton Donnelly In The News

One last note, we are excited to report that I’ve been staying at the top of crypto news this tax season. I’ve taken part in multiple interviews with several national and international crypto podcasters, such as crypto pioneer Charlie Shrem, Brad Kimes, Ivan on Tech and more.

WATCH NOW: Crypto Tax Amnesty? CPA Clinton Donnelly Shares Critical Insights on How to Talk to the IRS and File

Tax Filing Deadline Extended to July 15 Due to COVID-19

The tax filing deadline and payment deadline have been extended in response to COVID-19. Read more about how the IRS taxpayer relief efforts apply to you.

In response to COVID-19, the tax filing deadline has been extended by the IRS in efforts to help a great many individuals and businesses. They now have until July 15th to pay any federal income taxes they owe. The delay is available to individuals who owe $1 million or less and corporations that owe $10 million or less. The IRS will not charge interest or penalties for this delay.

Payment and Filing Deadlines Extended

payments

Previously the IRS had only postponed payment, not filing, but on March 20th the Treasury announced filing would be postponed as well.

This could be an enormous boon to those who owe money. It’s never easy finding the cash to write the government a check, but it’s especially difficult now, as the coronavirus has curtailed so many activities: Many businesses and employees are seeing a drastic drop in income, and decimated stock portfolios may force some investors to sell at a loss to cover tax bills. Hopefully, in three months, taxpayers will be in a better position to pay.

Refunds, Federal & State Returns

IRS letter

For those who have already filed and are expecting a refund, nothing has changed; this does not mean they will have to wait any additional time for their refunds. Those expecting a refund have no reason to take advantage of the delay–it’s to their advantage to file as soon as possible.

This delays in filing and payment only affect federal returns, not state. However, some states are offering similar relief. The American Institute of CPAs has created a list of what each state is doing.

Note that this is a fast-moving story, so even if your state has nothing planned as of today, that may change by tomorrow.

Details of the Tax Filing Deadline Extended

tax time

This tax postponement plan began as an oral promise, but the IRS has started to issue more details and guidance in its e-newsletter:

  • The individual taxpayer relief includes all individual returns, includes self-employed individuals, and all entities other than C-corporations, such as trusts or estates.
  • The IRS will automatically provide this relief to taxpayers. Taxpayers do not need to file any additional forms or call the IRS to qualify for this relief.
  • For C Corporations, income tax payment deadlines are being automatically extended until July 15, 2020, for up to $10 million.
  • This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020.
  • The relief only applies to federal income tax, not to any other kind of federal tax.

Since this is a very new program, we will be closely monitoring the situation for additional official guidance.

How We Handle Tax Filing Extensions

Donnelly Tax Law Logo Banner

Here at Donnelly Tax Law, we automatically, and in normal circumstances, file extensions for all our clients. This gives our clients until October 15th to file. However, please note that it does not extend the payment deadline of estimated taxes, which are usually April 15th and now extended to July 15th. 

If you’re already a client of our’s and have questions, please contact our client manager or use our contact page to be in touch. 

If you’re not a client of our’s but are interested in having us help you with your taxes, please schedule a consultation

© 2020

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Crypto Tax Audit Explained – Interview Video & Transcript on Ivan On Tech

In this interview, I go through an actual crypto tax audit documentation request from the IRS to explain what’s involved and how you can protect yourself.

Going through a crypto tax audit is one of the worst experiences a crypto trader can imagine. In our interview with Ivan on Tech, we show you that it doesn’t have to end horribly, and you do not have to go up against the IRS alone. I will walk you through an IRS Information Document Request (Form 4565) from a real crypto tax audit to explain what to expect and how you can protect yourself from getting audited.

Crypto Tax Audit Explained Video Transcript

[Ivan on Tech] Ok, guys, we’re here with Clinton Donnelly of Donnelly Tax Law. Clinton is a tax expert, especially when it comes to crypto taxes and he has some very urgent and very important news that has to do with CryptoTaxAudit. 

And you’ve all got to know it because whether you’re living in the U.S. or abroad, this applies to you. Even if you’re not in the U.S., these rules might be taken by your tax authorities, and they might do something similar in your country because the U.S. is basically setting the tone for the rest of the world when it comes to this.

So Clinton, what are we discussing today?

[Clinton Donnelly] We’ve already seen two crypto tax audits come out from the IRS. And what we’re seeing are the initial information requests related to that audit. And what we have tells us a lot about what the IRS is doing and how crypto traders can prepare. I thought it’d be good for us to have that discussion so that we can start to clear away the mysteriousness about an audit and try to help people feel more comfortable, especially since we’re in tax season now.

[Ivan on Tech] Right. And I know you have a document that I want to share on the screen right now so people can see it. Let’s go through it, because I guess that is where most of the information is.

The Form 4564 In A Crypto Tax Audit

[Clinton Donnelly] Right. So what we’re looking at here is when an audit begins from the IRS, it starts with a letter. And in that letter, they have what they call an information document request. In this case, Form 4564.

And they list all this information they want you to give them. And we’ll just leave this up on the screen a little bit here and we’ll talk through it. As you look through it, it would be a normal response to have fear and terror in your belly. OK. So let’s just embrace the fact that that’s what we’re talking about. 

Nobody wants to be audited. The U.S. is a little bit different than other countries in the world. From a tax point of view, we’re actually not as sophisticated in our information collection as other countries in Europe. 

Many European tax authorities, like perhaps in Sweden, already know how many deposits you had in your bank account. They know where you’re spending your money, and they can do this just from their computer. 

But the IRS does not have that breadth of information at their hands. So they request a whole bunch of documents. And it’s a broad list of things that they want to get. It’s kind of terrifying as you read it, especially if you think you don’t have some of the records?

But first, let’s realize that any American taxpayer watching this and probably non-Americans have fear; they have a lot of emotion; and I just want to acknowledge that they have anxiety. 

Maybe they never reported their cryptos back in 2017 or 2018?  

And, they’ve heard this year we have to answer this question:

“At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any  virtual currencies?”; and there’s fear. 

I was talking to one guy, a fairly well-known person. He stopped reporting his taxes back in 2015. So he hadn’t even filed for three years. And he said, “Clinton, How do I get back to being in compliance?” 

We have tax amnesty things, but, you know, you’re not alone. A lot of people are afraid.

“Well, if I report these things? I might have to pay taxes that I don’t have money because my cryptos have all gone down”. You know, there’s a lot of fear out there.

The Statute of Limitations In A Crypto Tax Audit

[Ivan on Tech] But also, yeah, I remember we had this chat a few weeks back. And I got a question afterwards that we didn’t discuss.   

And that is, “What about the statute of limitations?” If somebody traded in 2012, like how far do go back and what are the rules?

[Clinton Donnelly] Ok. Statute of limitations is generally three years from when you filed the tax return. 

Unless you had to file one of the anti-money laundering forms, which in fact almost all crypto traders (except for the smallest ones) would have to file.

In which case, the statute limitations for the entire return is now six years. 

So let’s say the return on filing this year, 2020, is for the 2019 tax year. So it’s open until 2026 for an audit, which means right now, the IRS can go back into 2014 for audits at this point.

Now, if you failed to report a major amount of income, let’s say you didn’t report your cryptos gains in 2017. That would be considered, technically, tax evasion, and you completely lose all statute of limitations protection. 

Likewise, if you never file the anti-money laundering forms, your return no longer has statute of limitations protection. 

What does that mean? 

That means there’s no limit to how long they can come and get you. 

So the purpose of the statute of limitations is to provide at least a protective shield around the taxpayer who’s honest and reported everything. There’s a limit on how much time that the IRS has to come after you.  

So you really want that shield. You want that protection by doing a good crypto tax return. And I would say this as we start to look at an audit, every taxpayer who has reported their crypto gains and filed their anti-money-laundering forms has nothing to worry about.

You may receive an audit letter, but you’re going to be very strong in answering and responding. You’re in a good position. So I want to give that comfort and assurance out there.

Hope that helps.

What Else Does The IRS Ask For In A Crypto Tax Audit?

[Ivan on Tech] Got it. So let’s get back to the list. So we see, for example, the IRS asks you about emails, screenprints, hardcopy prints, transaction receipts, and so forth. Wire transfers. Lists of all virtual currency kiosks like BTM, ATM, and so forth. So you can see on the screen the other points. 

And so this is the new thing for this year? Or this was in this questionnaire even in the past? Or it’s completely new?

[Clinton Donnelly] Well, this is the second information document request that we’ve gotten for cryptocurrencies. And it’s a form they’re using. 

These exact same words occurred on the first one. 

In this case, with this client, they were amending their 2017 tax return, and they were reporting the anti-money laundering forms and reporting they’re like-kind exchange. 

And they had never received one of those educational letters that came out last year telling people to check the returns. They had never received that. They received this just because their tax return included cryptos. 

This document comes out of the Philadelphia office, which is interesting because that’s not where he mailed his return. The Philadelphia office is the one that’s handling strictly cryptocurrency compliances. 

So it’s very interesting. They turned it over to the crypto department.  And these questions are very scary. 

But the bottom line is they’re asking for every shred of documentation, however meager, about everything crypto you have. 

Now, if you were a trader and you did all your trading on, let’s say, Binance and Coinbase, you’re probably in a good position because those exchanges keep very good transaction records. You’re probably bringing money in and out from Coinbase. They have very strong records, every trade, every transaction, all the transaction fees, well-documented. So that pretty much addresses all your needs. 

Now, if you’re using Shapeshift, EtherDelta, other peer-to-peer exchanges, over-the-counter trades, things that generate very light documentation, or if you want to capture that transaction record, you have to capture it right then and there because there’s no permanent log. You know, those exchanges, you’re dependent on having these records. And if you don’t have them, well then, you know, that gets into what an audit is all about.

Now, you know I was talking to this very guy, and he said he’s been through two audits before, not crypto, just regular audits. 

And I said “You understand how this works?”

He goes, “yes.” 

He said, “The first thing is you never talk to the IRS yourself. You always have a representative.”

I said, “that’s absolutely right.”

Just like on the T.V. shows, you know, when the police haul in the suspect, they put him in the room. There are two policemen asking questions, you know, and they read you your rights. You never say anything until your lawyer is present. 

They are experts at getting you to say things that are to cause trouble later. They go right for the jugular. 

So that’s what we do with IRS representation. That’s what I do. I represented a 117 people last year with the IRS. 

So we represent, we talked to the IRS on your behalf. That takes a lot of emotion out, takes a lot of fear out. And, you know, we basically put together documents. 

We try to bury the IRS with the documents. We are as honest as possible. We try to make them feel like, “You are wasting your time on this client. You know, there are bigger fish to fry. You’re not going to get anything out of this client.” And that’s what we do. 

Hey, I got a quote for you from a U.S. Senator, Henry Belmont of Oklahoma. And he makes the statement; he says, “In a recent conversation with an official at the IRS. I was amazed when they told me if taxpayers of this country ever discover that the IRS operates a 90% bluff, the entire system would collapse.”

[Ivan on Tech] Right.

[Clinton Donnelly] It’s just like when the police haul you in as the suspect. They don’t know anything. The police don’t know enough. They’re trying to get information from you. 

So having an intermediary kind of tightens up that pipeline. Make sure we defend your rights in that process. 

I mean, you’re reading this right now, and you’re probably thinking, “Oh, my gosh. Oh, my gosh. I don’t know if I have those records anymore.”

That terror, that’s what they want. The IRS operates on fear. 

They only want to publicize when they’ve crushed people on the news. You know, they only take cases to court that they know they can win. 

All right. So they always publicize how effective they are. That’s because they cherry-pick what they’re going after.

Learn More: Full Service Crypto Tax Filing by Donnelly Tax Law

Preparing A Crypto Tax Return So It's Less Likely To Get Audited

[Ivan on Tech] Yeah. So I think it’s very important to notice what you just said. 

And that is the fact that, you know, when you read the statistics, and that’s true even here in Sweden, you hear the statistics for example, the IRS here in Sweden ,the agencies, they win 90 percent of all cases in court. 

But that is because, as you say, they only take cases to court that they’re certain about.

"So there are other millions of cases that went completely fine, that went completely as they should have, but they never get to the public. And they said, you have these fear stories, that, "Hey, if you're being targeted, you're going to go to court, and it's 90 percent chance you will lose." But in reality they only take a small portion. And as long as they have good representatives, it shouldn't be an issue. If you also have all conditions that you can piece together, and that's exactly why you're here, and that's why we bring you on the channel several times because you've done it."

- Ivan on Tech

"So looking at this, yes, people feel fear, but in reality, you've also got to understand that it's nothing to worry about as long as you take the steps, for example, getting help and acting on this. Not just feeling fear and leaving this, hoping it will go away. And maybe they won't find out something that you're hiding. If you have nothing to hide, really, it's all perfectly fine."

- Ivan on Tech

[Clinton Donnelly] Absolutely.

"As long as you disclose everything on a tax return with your cryptos and report the anti-money laundering forms, they're going to have a very difficult time coming after you and hitting you with penalties. That's what we do when we prepare what we call a bulletproof tax return."

"We make sure to report all possible income, even the like-kind exchange. We do the anti-money laundering forms. We report all the scams that you suffered and make sure you get the full loss for that. And we also do a disclosure statement. The purpose of a disclosure statement is to minimize the power of an audit."

Auditors are on monthly quotas. The guy who issued this letter is on a monthly quota. He’s got to bring in so much. 

When the disclosure statement is in there, he’s prevented from using a 40 percent accuracy penalty. They need the penalties to reach their quota, his monthly quota. 

So by taking that out of his tool bag. All of a sudden, this thing looks a lot less interesting, and it puts him on the defensive. 

So that’s what we do when we prepare a return. 

You know, lots of people are going to need auditing—more than I could ever take care of. So, you know, in this case, we just take a strong view. We take an experienced view to it.

"These guys at the IRS know less about cryptos than anyone who's been watching your show for a week. So, they don't have the expertise, they don't have the time to focus on it. All they know is how to go after certain failure to report."

So here’s what they’re doing. And this is a good point, because all in the U.S., we have these documents called the 1099K. 

And it’s where a company reports to the IRS some income that they paid to somebody. 

And in this case, I was talking to a guy who had a Bittrex; you know he had a $1 million 1099 that they told Bittrex told the IRS about. So the IRS is going to be looking for $1 million on his tax return. 

He was panicked because he only had like maybe thirty thousand dollars in cryptos finance, but he was a high-frequency trader. So he was generating a lot of buys and sells. 

If you add up all those buy transactions, let’s say had ten thousand dollars and three times a day, I buy something with the ten thousand, that’s thirty thousand dollars of buy. OK. 

That’s where the one million dollar number comes from. 

We have to list all your transactions so we can see that it matches or exceeds the $1 million amount that, in this case, Bittrex had told the IRS about. So, you know, those numbers scare people.

"It's reasonable to be scared of the IRS, but you got to know how to respond. Make sure you do a tax return when you respond to the IRS. You do it smartly. You get a professional. And, you know, I don't think people have much to worry about."

"There is so much opportunity here for the IRS. They don't have to shake the tree too hard to make money. But, you know, the better defense you have, the better you're going to survive through the whole thing."

[Ivan on Tech] Got it. Let’s move on to the next picture.

Providing Crypto Records For A Crypto Tax Audit

[Clinton Donnelly] This is the one that starts with the records reflecting the value of any sale? That one?

[Ivan on Tech] Yes.

[Clinton Donnelly] Now, if you look at the third bullet, it says, 

“List of all blockchain addresses owned and controlled by the taxpayer.”

And we’ll see on the next page it says that…

“They’re going to be using third party information sources to double-check our information.”

"So you can pretty much assume that this is going to take your blockchain addresses and plug it into Chainalysis and see what was happening in your crypto accounts. Right."

- Clinton Donnelly

"So you just don't know where/who you bought your bitcoins from. You know, you might have bought it from some guy who had had a hacked Binance. Right. So you might be a possessor, unknowingly, of a hacked Bitcoin. But, you know, if they use the chain analysis, they'll start to see that stuff. So it can be misleading."

- Clinton Donnelly

I’m sure they’re used to doing this. But, you know, the Chainalysis links back to your Facebook. It links back to all sorts of information sources to paint a picture of a taxpayer. So just be aware that’s kind of what’s going to happen here.

That’s just what they’re going to do.

Also, the last two bullets are very interesting to me. The next to last one says 

“List all your digital currency exchanges.” 

That’s basically all exchanges, all peer to peer facilitators. This is basically, list everything: tell them your I.D.’s, your emails, your addresses. 

What’s the purpose of this?

"Well, this links right back to the anti-money laundering form called FBAR -where you have to list all your foreign exchanges. If you fail to file an FBAR form, that's a $10,000 penalty when the IRS discovers it. And it's $10,000 for every exchange you didn't report during that year."

- Clinton Donnelly

So you know how it is. If you’re going to ask somebody or you had real burning question to ask them. It wouldn’t be the first question you asked them. It might be the next to last question.  

Which is kind of what you’re seeing here. This is the one that’s going to cause the most financial damage to a taxpayer.

"So I think fundamentally, the IRS cannot effectively audit a list of crypto capital gains transactions. I mean, there are so many different ways to calculate it. The best they can do is, as I was describing before, is see are you in the right ballpark of what we expected you to tell us? That's the best they can do with that."

But here it’s cut and dry. 

In the last bullet, “List of all counterparties for any P2P virtual currency transactions (on-chain, off-chain, email address, user I.D.’s).”

This goes right to the second anti-money laundering Form 8938, part VI. 

Where you have to list all the counterparties, to any trades, that are not U.S. persons. 

Well, when you’re trading on any exchange, the beauty of the exchange is it’s anonymous. You have no idea who you’re trading with. 

It’s simple, easy. 

Guess what? That’s a problem from an anti-money laundering point of view.

"So what we do on a tax return is we just simply say on form 8938, it's unknown. You know, we traded a million dollars, but with lots of trades. We have no idea who the people are, but at least we declared that on the form. If you don't even declare that in the form, then, you know, you failed to submit the correct paperwork, and it's a $10,000 penalty."

[Ivan on Tech] So just to clarify, this is only for peer-to-peer exchanges like a local Bitcoin, because there it can be anonymous? But if you’re using Binance, is that also peer-to-peer? Or is it that you’re basically trading with Binance? 

Because it really depends how you see it.  

If you look at technically, the matching engine matches you with someone else. But it’s not peer-to-peer like local Bitcoin, where you actually find someone and then maybe you just send to their bank account directly, and you don’t have any intermediary in the transaction, then is it truly peer-to-peer? 

So how do you view it is Binance, for example, peer-to-peer as well?

[Clinton Donnelly] Well, I’m not sure the IRS is going to have a good distinction on that point. When we read through these requests, there is definitely an interest in anti-money laundering type activities or money laundering activities.

They’re very much interested in cash transactions, Crypto kiosks, and this case, you know, peer-to-peer, where there’s very little documentation or regulation of who is involved in the transaction.

So when I read these, there’s a bit of a, “Have you been engaged in criminal activities?” taste to it.   

As opposed to, purely,” did you report all your trades?” which they clearly ask, but that’s not their main focus

Crypto Tax And The FBAR

[Ivan on Tech] But also, it’s important to note that whenever we had these discussions previously, some people were commenting, 

“This FBAR, I’ve never heard about it, or it’s not applicable.” 

So there seems to be some dispute.  

Some people think that you should do it. 

And some people think that you should not do it. 

And maybe it’s because the people mostly are uneducated around this topic. 

But have you heard that as well, that some people say “That this FBAR thing, it’s not really an important thing in Crypto?”

[Clinton Donnelly] Very good question.

"It's an open debate. In fact, the General Accounting Office, a government watchdog organization, came out and said the IRS needs to clear this up, and FinCEN needs to clear this up. And then the IRS came out on Monday and said we're not going to make any comment on it."

- Clinton Donnelly

Well, let’s take that apart.

"Let's say to drive on the highways in Sweden. You can not go faster than 100 kilometers an hour. All right. So you're on a section of the highway, and there are no speed limit signs. But, you know what type of road this is, you know, you should only go 40 kilometers an hour. Does that mean you're free to go any speed you want because there's no signs? No. You know when the law is clear, people are expected to understand that."

- Clinton Donnelly

If you skip forward to a couple of pages in that presentation where it says, “Have a schedule B problem?” and display that

Crypto Tax And Schedule B

On a U.S. tax return, there is a form called schedule B.   

And schedule B is where you list your interest and dividends income.  

And at the bottom, Question 7, and it’s been here for several years. (And of course, the IRS would put this question in small type, right.) 

So I hope maybe you can zoom in on this for people, but it asks this question.

"At any time (during this case was 2017 return), did you have a financial interest or signature authority over a financial account such as a bank or brokerage account located in a foreign country?"

- IRS, Question 7, Schedule B

Well, you asked me the question, Does Binance fall into the category of a financial account in a foreign country? 

Now, some people argue cryptos aren’t money, but I think it’d be harder to argue that it wasn’t a financial account. 

I mean, everything is expressed in terms of U.S. dollar value. You know, it’s hard not to argue it.

The second question is, 

“If, yes, you are required to file FinCEN, Form 114, Report the Foreign Bank and Finance Accounts, FBAR, to report that financial interests or signature authority.” And it says either yes or no. These are either yes or no questions.

“When you sign your tax return, you're basically signing under penalty of perjury that it is true, complete, and correct, as I listed them below. So if you don't answer the question, it's not complete. It's perjury. This is why it is the easiest way for the IRS to come after a crypto trader. Because you're deprived of your typical IRS taxpayer rights. Because this question comes out of the Bank Secrecy Act. And that's why they can ask it, and they can prosecute very quickly."

So on this question, those naysayers have to say that Binance was not a financial account, if you were to make that claim.

[Ivan on Tech] Got it. So we looked at the question with FBAR.

We looked at the letter from the beginning, from the beginning of this video. 

What else is important here? 

Which other pages would you like to highlight in this presentation?

[Clinton Donnelly] Well, I think it’s worth mentioning because there’s a lot of people that are out who are HODLrs who are looking to make their money on HODLing. 

And so they’re engaging in lending sites where they can park their currency and get interest. 

Now, when these happen, these lending sites. Have you ever wondered, “How can somebody pay me 8% interest on my ETH?” How does that happen? What are they doing on the backside? 

And one of the common things they’re doing is they’re participating in, according to the government research,in tumblers and mixers which exchange your coin for other people’s coins.

"So if you're participating in a lending situation, you might find when you finally take your coins out that you have a lot of coins that maybe won't do very well on a chain analysis research. If you get audited, you know, then all of sudden your account might get additional interest from the auditors."

- Clinton Donnelly

You may also have difficulty unloading those coins on exchanges if they do a Chainalysis track on your coins. I think that’s interesting at this point.

[Ivan on Tech] That’s very interesting, actually. 

But now people also have these devices where you can get interest without essentially intermediaries. 

But maybe we can take another reason because like it’s a hole, rabbit hole of information.

"But yes, if you're using Centralized, like a company that gives you a percentage, there could be a possibility that they're selling your Bitcoin that should be deposited. And in return they get dirty Bitcoin, and they make their profit, and they give a portion of the profit to you without you actually knowing that in reality you exchanged your Bitcoin for a dirty Bitcoin."

- Ivan on Tech

So that’s actually true. Yeah, that’s very important. What else? What else? What else? What kind of other observations and the insights can we give to our viewers

[Clinton Donnelly] Well, I think, first of all, as we look at this.

Every every taxpayer in the U.S. is faced with having to answer the new question on schedule one, which is, 

“Did you buy, sell, send, receive or have any financial interest in virtual currency? Yes or no?”

"It's a coming out-of-the-closet time, and if you're a [crypto] trader who never reported in 2018 and never reported 2017, at least start going forward in 2019 to make your tax return correct. File for an extension if you want more time to do that. But do that correctly. And file the anti-money laundering forms."

Recommendations For Protecting Yourself Against A Crypto Tax Audit

Over at my website, at CryptoTaxAudit.com, that service for about $97 a year, it provides a type of insurance. You get IRS representation in case you ever get an audit. And we can help you with other questions that you might have if you ever get an audit.

We also have some instructional videos on how to do the FBR forms, how to do your own crypto tax return using TurboTax. 

Basically, you’ll go offroading with TurboTax to make it do the things you need to do as a crypto. 

I’ve put everything I have in terms of creating a bulletproof tax return into these videos.  

They are very affordable.  

That would be something for people I’d recommend for people to get their 2019 return in order.  

Then go back after tax season, and maybe go back and fix 2017 and 2018 if you didn’t do things right.  

You know, it’s important.

"There's still a window of time to get things correct. The IRS is not moving that fast, although they are moving. It's time to get things correct."

- Clinton Donnelly

One of the lessons I think we learned from this is that you really only want to deal with exchanges that are keeping very good logs of your transaction records. You want to backup those logs monthly. You don't want to be like so many people who are trading heavily on Cryptopia. And then the next day they found it was closed and they couldn't get any transaction records out. You couldn't prove where you made your coins. You know, it puts you in a very weak position in case you're audited. If you're using peer-to-peer exchanges where they're just passing records, you want to make sure you keep screenshots, emails, anything you can, counts, internal, even handwritten notes made at the time count in terms of defending yourself in a type of audit. And I think you should use the capital gain services like CoinTracker.io and CryptoTrader.tax are good services that help you generate the capital gains reports that you need and information for your anti-money laundering reports as well."

- Clinton Donnelly

Get 10% off CoinTracker.io by using our affiliate link.

[Ivan on Tech] Good, good, good. 

And you guys definitely use that.

"So you can find the links in the description for CryptoTaxAudit.com, which is the subscription for the services with videos and that you can use to prepare yourself and also live a link to Clinton. He's a bit more expensive, but if you truly need help, he will help you with the future and past tax returns."

- Ivan on Tech

That being said, Clinton. Any last words to our audience before we wrap this up?

[Clinton Donnelly] Yes, you know, we’re talking about some of the services offered, but

"If you're a [crypto] trader, you know, don't panic. Don't get nervous. Just do the right things and entrust the process to work."

You know, I understand the emotions, the feelings.  

I’m completely sympathetic, and I’m not trying to scare anybody. 

But I think,

"The more we know, the better we can feel about our strategies moving forward."

I just wish everybody the very best at making profit here this year.

[Ivan on Tech] And also, just to end this,

"I think it's important to note that this worry should never stop you from actually trading."

That is kind of what hurts me the most. Like, my feeling when I see this is that people like, “Oh, man, I see this opportunity in the market, but I’m not going to trade because I’m afraid of the IRS.” 

"So really, you should not be scared. Just do everything correctly. Do whatever you want in the market—document everything. But the worst thing is that when people miss out on opportunities because they're scared of the IRS. Because it's like, in reality, you're putting yourself in this cage, and you're kind of removing your own freedoms and human rights. Man, if you want to trade, go trade, do whatever you want to keep all the records. If you need help, go to professionals like Clinton and everything will be OK."

- Ivan on Tech

[Clinton Donnelly] You’re absolutely right.

I was talking to a guy, a young kid in college made some money on Fossetts, and we were talking and he goes “I’ve got to pay taxes. Oh, my gosh. Maybe I shouldn’t trade anything, just completely get out of Cryptos.” 

I said, “no, no, no.” 

You got to realize.

The richest people in the world live in countries with the highest tax rates. All right. 

The poorest people in the world live in countries that have the lowest tax rates. 

So what does that tell us?

"Hey, look, I would rather make one hundred dollars and pay 30 in taxes than to make only 20 dollars and pay nothing in taxes. All right."

- Clinton Donnelly

Well, you know, taxes happen. And you can fight the tax rate, the brackets and stuff, you know. 

But honestly, there are some basic things in U.S. Long term versus short term gains, the biggest way to save money. But taxes happen.

"It's far better to say I made a million dollars and paid $200,000 taxes because you pocketed $800,000. All right. Focus on what you're pocketing. Not on taxes. Taxes happen. You know, you're going to make money. Focus on making the money and just pay the taxes as you go. Just don't get behind it, you know, because then it can become too big for you."

 

[Ivan on Tech] Clinton, Thank you so much for being here. And I’ll see you all very soon

Protect Yourself Today With CryptoTaxAudit.com

Watch The Crypto Tax Audit Explained Interview Video

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How are Cryptos Reported on Anti-Money Laundering Forms?

Here I share exclusive excerpts of my book, ‘Basics of Crypto Taxes’ to show you how cryptos are reported on anti-money laundering forms.

I’ve been getting so many questions lately related to the reporting of cryptos on  anti-money laundering forms. There’s a lot out there about the anti-money laundering forms, but when it comes to reporting your cryptos on them… Well, that’s new territory for most traders and tax professionals.

I wrote the book Basics of Crypto Taxes, to address this exact topic. It comes from the years of experience I have in filing anti-money laundering forms and crypto taxes. Here’s a sneak peek into it so that you can better understand how cryptos are reported on anti-money laundering forms.

The following was extracted from the book “Basics of Crypto Taxes” by Clinton Donnelly. Some additional comments have been added.

What are the two anti-money laundering forms required of individuals?

International financial regulations require each country to take significant steps to prevent the laundering of the proceeds of crime and terrorism funding also called money laundering. A large part of the US anti-money laundering (AML) enforcement is the requiring of forms to be filed related to foreign transactions. These forms are used after-the-fact to scare people who have misreported or not reported when they should have.

For the individual, two forms must be filed to comply with AML regulations. The first form is called the Report of Foreign Bank Accounts and Financial Accounts. The second form is the Statement of Specified Foreign Assets.

What is the FBAR form?

crypto audit defense

The FBAR form is the short name for the Report of Foreign Bank Accounts and Financial Accounts. This form is also called FinCEN Form 114.

The FBAR form has been a requirement for individuals to complete since 2004. On this form, the taxpayer lists the maximum balances of his foreign financial accounts during the year. Foreign crypto exchanges are considered foreign financial accounts by FinCEN.

Does everyone have to file an FBAR form?

No. Filing this form is not required if the sum of the maximum balances of all foreign financial accounts added together is less than $10,000. If the sum of all balances is more than $10,000, then all foreign financial accounts regardless of the balance must be reported. Many people mistakenly think that they have to report only specific accounts with a balance of over $10,000. This is wrong. It is the sum that is compared to $10,000.

If you are required to filed an FBAR, then you must report all foreign accounts regardless of the account balance. This means if you had a foreign exchange account that you never formally closed, then you must report that account even if the maximum balance all year was zero.

What is the penalty for not filing the FBAR form on time?

If the IRS decides that you should have filed an FBAR when you hadn’t, then there is an immediate $10,000 assessed the moment the IRS issues you the notification letter. This penalty increase to $50,000 if you don’t file an FBAR within six months.

Once you give an FBAR to the IRS after receiving the notification letter, an additional penalty is assessed. This penalty depends on whether the IRS decides that you were willful in your negligence or not.

The non-willful penalty for not filing this form is $10,000 per account that should have been reported. For example, if you traded on five foreign exchanges and the sum of your maximum balances on these exchanges was $150,000, and you’d never filed the FBAR form, the penalty that could be assessed would be $50,000 or $10,000 times the number of accounts not reported.

The willful penalty is 50% of the account balance of each account. This penalty used to have a maximum of $100,000, but this limit has been removed.

Are you serious? A $10,000 penalty?

tax trouble

Dead serious. Congress has chosen to use a harsh penalty to motivate honest people to be diligent to complete this form. Several times this penalty has been challenged in the courts as a violation of the eighth amendment protection against “excessive fines imposed.” The Supreme Court has sided with the government because of the AML argument. The presumption is that the funds in the account are only the tip of the iceberg of the amount of dirty money that was being laundered.

When is the FBAR form due?

This form is filed at the same time as your individual income tax return or April 15. If you file for an extension on filing your income tax return, you automatically get an extension on your FBAR filing.

Filing the FBAR form after the deadline is an automatic $10,000 penalty. This is Congress’s way of getting your attention to comply with the regulations. Criminals and money launderers, of course, do not want to file these forms because it is incriminating to them. So, don’t behave like a criminal. File your FBAR on time.

How to file the FBAR form?

If you use a professional tax preparer, their tax software might enable them to file your FBAR form for you. However, self-filers are not as fortunate. TaxACT, TurboTax and all the other tax software packages have chosen to not offer electronic filing of the FBAR form for you. (There must be a fear of legal liability.)

As a result, the self-filer must use the government website to file his FBAR. It is easy to do. I recommend preparing an FBAR form 114 using the PDF form method rather than the online method. The form is uploaded onto this website https://bsaefiling1.fincen.treas.gov. By using the PDF version, you can re-use the PDF form in subsequent years by just updating the maximum balances. Considering it is a government website, it is reasonably easy to use.

Should you file an FBAR form if the due date has passed?

paying taxes

Yes, however, you need to claim tax amnesty on any late-filed FBAR form. Failure to do so will result in an automatic $10,000 penalty (footnote 1). To request this amnesty, when filing the FBAR there is an opportunity to select an explanation code for late filing. I recommend selecting option ”Z” other. A box will open to allow entering a custom explanation like, “I did not know I had to file. This form is submitted under the Delinquent FBAR procedure”.

What is Form 8938 - the other anti-money laundering form?

In 2010, Congress passed a sweeping law called the Foreign Account Tax Compliance Act (FATCA) which significantly increased the reporting requirements of Americans with foreign financial accounts including crypto exchanges. This law obliges taxpayers to report their foreign financial accounts and financial assets each year with their tax return. To be clear, this is an IRS form that is considered part of your tax return.

In addition to reporting your foreign accounts similar to the FBAR form, you must report all “all financial transactions and contracts for investment purposes where the counterparty is other than US person” (footnote 2). By this definition, the sum of all purchases and sales of all crypto assets during a tax year must be reported. Since the other party of an exchange is anonymous, you must assume they are not a US person, even using a US exchange. Depending upon the volume of trades you make, this number could be orders of magnitude higher than the value of your assets. This calculation of all purchases and sales would include even those on US exchanges (footnote 3).

The FATCA law and Form 8938 were written with very broad terms such that assets may be counted multiple times. The penalties for underreporting are so high, $10,000, that there is no incentive to underreport or under-characterize these foreign assets (footnote 4). Basically, the bigger a number you report, the safer you are.

Are there penalties for not reporting or reporting after the due date?

Yes. The penalty for not filing Form 8938 with your tax return is $10,000.

Consequently, if you need to fix past tax returns because you didn’t include an accurate Form 8938, you must do it under a tax amnesty program (footnote 5).

How to file Form 8938?

tax planning

Form 8938 is filed with your 1040 tax return. If you e-file your tax return, then the 8938 gets e-filed with it.

See My Book: 10 Steps to a Great Crypto Tax Return

Does everyone have to file a Form 8938?

My answer is Yes and No.

Yes. Form 8938 is one of those rare times where it is safer to over-report than under-report. The bigger the amount reported, the safer you are. Some people get fixated about not filing if under the threshold. I believe not filing actually draws more attention to you by the IRS data mining computers, than if you file.

No. Form 8938 is not required if the sum of the balances of your foreign accounts plus the sum of the buy and sell transactions is under $50,000 if single or $100,000 if married (footnote 6). Minimum filing thresholds are increased if you live overseas (footnote 7). Because of the broad description of foreign assets under the FATCA law, it is easy for a trader with no more than $10,000 invested in the crypto marketplace to exceed the minimum filing thresholds by doing frequent trades. There is nothing to gain by not reporting.

That being said, I recommend that all crypto traders file both forms regardless of the minimum filing thresholds. Why? The IRS is using data mining computers to catch crypto traders not reporting correctly. Data mining looks for logical relationships and flags taxpayers when the relationships are missing. So given that they know you traded on foreign exchanges, you should have filed an FBAR and a Form 8938. They can’t tell if you are excepted by being under the filing threshold. By filing, you satisfy the logical condition and avoid putting yourself on the list of taxpayers to be examined.

Footnotes:

1) For FBAR self-filers, see our Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

2) 26 USC 6038D(c)(2)(B)

3) Even if you do crypto to crypto trades on the US exchange like Coinbase Pro, the other party to your trade is not the exchange, but the other person they have found to take your trade. Since you can not assume that an anonymous person is an American, you must assume that the other persons to all your exchanges are foreigners.

4) GAO ‘Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad’ <2019> GAO-19-180 https://www.gao.gov/products/GAO-19-180, p17.

5) When you file for tax amnesty, you have one chance to do it right. I recommend using a professional to prepare your amnesty paperwork. The stakes are very high not to consider this. Still, if that is not an option, tax amnesty self-filers can use our do-it-yourself Crypto Tax Fixer Package, which includes my book Tax Amnesty Made Easy (not sold separately).

6) There are actually several tests for determining the minimum filing threshold on Form 8938, which makes it confusing to determine. The numbers listed here are the most conservative threshold levels.

7) See the instructions for Form 8938 about a complete description of the minimum threshold amounts.

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Why Crypto Traders Should Move to Puerto Rico by July 2020

Learn why crypto traders should move to Puerto Rico to cash in on special tax incentives and how to take action now to take advantage of these tax benefits.

You are an American crypto trader who is currently sitting on a ton of cryptocurrency. You've been at this long enough to see your potential to cash in on millions is right around the corner if you play your cards right by 2021.  

You have big and very realistic dreams of being a millionaire sitting at your fingertips as many crypto analysts anticipate the next potentially epic bull run is on its way. 

At the same time, you have been terrified by all of the hype regarding the IRS crackdown on cryptocurrency.  

You are being advised not to take this crackdown lightly, and you have enough wits to know you must take these warnings very seriously by educating and preparing yourself for what's to come. 

But, knowing that you may not have reported your past earnings correctly is sending you into a full-blown panic most days. 

You are worried about the IRS coming after your crypto earnings. And, you're looking to save money on your 2020 tax bill.  

However, your biggest concern is making it big when the time comes to cash in your crypto.   

If you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.   

We are going to explain why crypto traders should move to Puerto Rico to cash in on special tax incentives and why you need to take action now to take advantage of these tax benefits. 

Our goal is to help get you in front of this problem/opportunity, not to be the last one behind it. Read on to find out what you need to understand about Puerto Rico's tax opportunity and how to prepare for it as of today.

Tell me more about why crypto traders should move to Puerto Rico.

crypto traders should move to puerto rico
Photo by Wei Zeng on Unsplash

The chances are high that you've heard about the fantastic opportunity for U.S. citizens relocating to Puerto Rico to reduce their corporate tax to 4% and to reduce their personal income tax on capital gains to 0%. 

You have a general understanding that Puerto Rico could be your golden ticket to savings on your 2020 tax bill. 

And you are beginning to see that the tax-free benefits of that big crypto cashout everyone is anticipating could lead to early retirement if you are living in Puerto Rico when the next bull run hits. 

Still, you are not exactly sure how you qualify for this tax saving act.

You are also unclear about the severe lifestyle changes that will need to be considered.

And most importantly, you have no idea how to prepare.  

Read on to find out how you can qualify, the lifestyle changes that you will need to consider, and how to start preparing now to make it a reality.

I want to understand how I qualify to save money on my crypto taxes in 2020 and beyond.

crypto traders should move to puerto rico
Photo by Tatiana Rodriguez on Unsplash

How do I save money on my 2020 crypto tax bill?

If you're looking to save money on your 2020 tax bill, you might want to consider relocating to Puerto Rico no later than July 2, 2020, to qualify for the year.  

Because while you may not be unable to change how government regulators will decide to tax cryptocurrencies, you can change your tax future!  

Moving to Puerto Rico will allow you to take advantage of Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019), formerly known as Act 22, to pay no federal income tax from here out. 

And, we know that saving money on your taxes is about one of the most substantial risk-adjusted returns there is.

Can I move to Puerto Rico to avoid taxes?

You can avoid tax by moving to Puerto Rico through one of the tax programs, formerly named Act 22 (now referenced as Chapter 2 of the Puerto Rico Incentives Code (Act 60-2019). This Act requires that you have NOT lived in Puerto Rico during the previous 15 years. And, therefore, allowing you to take advantage of a 4% income tax rate, 0% dividend rate, and 0% capital gains tax rate.

Please be aware that BOTH YOU and YOUR BUSINESS need to make a literal move to Puerto Rico. It has to become your "tax home." More on this later, when we talk about making closer connections to Puerto Rico than the United States.

Why should crypto traders move to Puerto Rico?

Act 22 was born as the Resident Individual Investor Act. It was enacted in Puerto Rico in 2012 to promote the relocation of high-net-worth individuals to Puerto Rico. The law's goal was to provide attractive incentives to encourage investors to relocate to Puerto Rico. 

It has since been updated and bundled with other popular tax incentives and now called Act 60-2019, replacing the name Act 22 into law on July 1, 2019 with an effective date of January 1, 2020. 

*Please also note that new applicants will be subject to the most recent requirements from January 1, 2020.  

Puerto Rico has a very unique tax status.   

It is a territory of the U.S. but it is viewed as a "foreign country" for U.S. federal income tax purposes. 

Therefore an individual tax applies to its residents along with tax incentives geared to promote its economic development that may be very luring for U.S. Crypto Traders.

If both you (as a bona fide resident) and your business (as your tax home) move to Puerto Rico, then all your future capital gains on stocks, bonds, and other assets (as defined to include commodities, currencies, and any other digital asset or blockchain technology, a.k.a. crypto) become tax-free. In short, all your dividends, interest, and royalties you may receive from Puerto Rican sources become tax-free. (1)

What was Puerto Rico's Act 22, and what is it called now?

Puerto Rico's Act 22 was the Act to Promote the Relocation of Individual Investors to Puerto Rico. It has since been updated and bundled with other popular tax incentives and now called the Puerto Rico Incentives Code (Act 60-2019) referenced in Chapter two. Replacing the name Act 22 with Act 60-2019 as the law on July 1, 2019, with an Effective Date of January 1, 2020.  

*You will be obliged to follow the most recent requirements applying as a new bona fide resident.

Its intention was to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all interest and dividends earned after the individual becomes both a bona fide resident of Puerto Rico. Along with filing their business in Puerto Rico, as their tax home.

What are the benefits of chapter two of Act 60-2019 (formerly known as Act 22)?

  • 100% tax exemption on interest and dividends derived, AFTER becoming a resident of Puerto Rico and through December 31, 2035. (2)
  • 100% tax exemption from Puerto Rico income taxes on all capital gains accrued, AFTER establishing residency. (2)
  • 100% tax exemption concerning gains from the sale of property acquired AFTER the individual becomes a bona fide resident of Puerto Rico if the sale takes place before January 1, 2036. (2)
  • Investment income accrued before becoming a bona fide resident of Puerto Rico will be taxed at 10% if realized within ten years after residency is established. If the gain is achieved after the ten years, but on or before December 31, 2035, the tax is 5%. (2)
  • Capital gains appreciation on investments that occur after becoming a bona fide Puerto Rico resident can allocate to Puerto Rico.

Special rules apply to the gain from the sale of securities acquired before the establishment of residence in Puerto Rico.

We asked Juan Robles of Etrends Group about these special rules.

Any appreciated property acquired in the US and later sold while a resident in PR will still have US tax implications. For US tax purposes, virtual currency is treated as property and US Regulation Section 1.937-2(f) provides that any gain may be subject to an allocation based on holding period (bifurcation rule).

Juan Robles, CPA Partner, Etrends Group

What is Act 60-2019?

"The Governor of Puerto Rico signed into law the Puerto Rico Incentives Code as Act 60‐2019 (the "Incentives Code"). In general, the Incentives Code compiles into a single code many of the Puerto Rico tax incentives laws used to promote the island's economic development, with some modifications, in order to establish a new transparent and efficient process for granting and overseeing all the incentives afforded under the Puerto Rico's incentives laws. The Incentives Code consolidates various tax decrees, incentives, subsidies, and benefits, including Act 20, the Promotion of Export Services Act, and Act 22, the Act to Promote the Relocation of Individual Investors to Puerto Rico." (3)

I want to understand the lifestyle changes that I need to consider by moving to Puerto Rico.

crypto traders should move to puerto rico
Photo by Jessica D. Vega on Unsplash

I'm not a crypto billionaire. Do Puerto Rico's tax incentives still make sense for me?

Yes! You may not be a crypto billionaire yet, but plenty of you are sitting on a lot of crypto that you want to sell when it's worth it. Many crypto traders are going to Puerto Rico with the anticipation of becoming a crypto billionaire. 

Cryptocurrencies and other crypto assets are explicitly included as eligible for tax exemption.

And, there is no better risk-adjusted return than saving money on taxes. Gain an extra 30% return on investment without the risk by saving on your taxes. Compounded over your lifetime, that is a considerable amount of savings for changing nothing but the place you legitimately call home. (4)

Do you have to file taxes if you live in Puerto Rico?

Yes, residents of Puerto Rico pay federal payroll taxes, such as Social Security and Medicare taxes.  

PR (Puerto Rico) source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion).

Any PR resident that has US source income must file federal taxes.

Juan Robles, CPA Partner, Etrends Group

I want to start preparing now to make saving taxes from Puerto Rico a reality in 2020.

What is the first action step to take?

The first and most critical step, however, is wrapping your head around how fast you have to make this happen if Puerto Rico is the right move for you.  

You want to be a bona fide resident of Puerto Rico by June 2, 2020, in order to save on your 2020 tax bill.

Crypto traders need to understand what rules they need to comply with to take tax advantage of this opportunity legally.

They must understand that they will be selling and rebuying their crypto. For more information, schedule a consultation at Donnelly Tax Law.

They must thoroughly understand residency compliance and how to form a closer connection to Puerto Rico than to the U.S. For more information, consult the Etrends Group in Puerto Rico. Here at Donnelly Tax Law, we partner them by providing the crypto calculations for them to file a crypto trader's taxes in Puerto Rico.

How can you prepare for this move?

  • You must become a bona fide resident of Puerto Rico.
  • You must prepare to unload your crypto (You have to turn it over.) Meaning, you will sell it and immediately repurchase it as a bona fide resident of Puerto Rico.
  • You must create closer connections. Meaning, you must create "closer connections" to Puerto Rico than the United States.

Does a trader have to rebuy his inventory of coins upon becoming a bona fide resident?

Bitcoin
Photo by Jürg Kradolfer on Unsplash

The short answer is YES if he wants to enjoy PR's 0% capital gains rate. Under Act 22, the 0% cap gain tax rate only applies to assets bought AFTER becoming a bona fide resident of PR. Assets acquired before to receive a 15% tax rate.

What does this mean to the potential crypto trader considering moving to Puerto Rico?

The 0% rate only applies to assets purchased after becoming a bona fide resident. That is the date that you receive the official designation from Puerto Rico of long term residence status and after the 183 days of residence have been completed.

If, after that date, the trader sells his inventory of coins and repurchases them promptly, he will incur the Puerto Rico 15% tax on any capital gains realized in this sale. It is possible that the trader might pay some hefty capital gains taxes this first year in Puerto Rico.

Hey, the US long term capital gains tax is 15% (for everyone except those in the highest tax bracket). You don't need to move to Puerto Rico to get that rate. Of course, there is a 3.8% Net Investment Income Tax (NIIT).

This repurchase is NOT a requirement of US tax law. Under US law 26 CFR 1.862-1. Personal property sold in Puerto Rico is considered Puerto Rico income as far as the US is concerned.

Why do crypto traders have to move to Puerto Rico by June 2, 2020, to take advantage of the particular Act 22 treatment?

If you expect to sell crypto and avoid taxes in 2021, you need to act in 2020 because you must establish yourself as a bona fide resident of Puerto Rico to qualify yourself for the 2020 tax year.

You will need the time (and a good amount of money) to apply to become a bona fide resident.  Prepare to give yourself about six months.

Give yourself a week's time, in order to complete the basic information on your application and get your criminal record issued from the state.

Give yourself an additional five months for the government portion (but please be rest assured that your residency status is back-dated to the original filing date).

How long do you have to live in Puerto Rico to be a bona fide resident?

crypto traders should move to puerto rico
Photo by jordi pujadas on Unsplash

Generally, you must reside there for at least 183 days a year.  There are many grey areas and nuances that you want to be clear on if you are going to take this step, so be sure to position yourself with a team of crypto and Puerto Rico tax experts from the start.  You also have to do the paperwork, applying with the tax authority there.

The application for an Act 22 Decree must include the payment of a $750 filing fee, but do expect to invest thousands more into applying and relocating yourself here.

What is a bonafide resident of Puerto Rico?

A bona fide resident of Puerto Rico can exclude their Puerto Rico source income from U.S. federal tax. Generally, under IRS §937 and the regulations thereunder a bonafide resident of Puerto Rico is an individual who:

You must qualify as a bona fide resident of Puerto Rico FOR THE ENTIRE TAXABLE YEAR for purposes of the US IRC and (2) the income must constitute Puerto Rico source income under the US IRC.

Please note the wording to qualify for the exclusion for a taxable year. You must be a bona fide resident of Puerto Rico for the "Entire Taxable Year." 

This text is why you must be living in Puerto Rico no later than July 2, 2020, if you want to cash in on the next epic Bull run predicted for 2021.   

You will have to have been in Puerto Rico one full taxable year. 

Again generally, you must be physically present and living in Puerto Rico for AT LEAST 183 days during the taxable year.

You must not have a tax home outside of Puerto Rico during the taxable year.

You must pay an annual charitable contribution for a non-profit entity of $10,000. It must be paid annually under the new Act 60-2019.

You must purchase property in Puerto Rico within two years of obtaining the decree under the new Act 60-2019.   

This property must be your primary residence throughout the validity of the decree. You must hold exclusive and complete ownership of the residential property for the duration of the decree. Joint ownership with your spouse qualifies. 

You cannot rent the property out to someone else. 

The determination of whether or not an individual is a bona fide resident of Puerto Rico for a taxable year is made according to rules outlined in the regulations issued under Section 937(a) of the US IRC.

You must not have a closer connection to the United States or a foreign country than to Puerto Rico.  

How do I create closer connections to Puerto Rico?

  • Where is your bank account?  
  • Where is your driver's license?  
  • Where are your relevant documents located?   
  • Where is your high school diploma? Your college degree?  
  • Where are your wife/husband and children living?  
  • Where does your mail go?
  • Where are your investments?  
  • Where do you own your house?

If you have answered the U.S., you have not created closer connections to Puerto Rico than the U.S. Make sure that you are moving your real life to Puerto Rico.  

There are various factors, all of which must be met by the individual to qualify as a "bona fide resident of Puerto Rico." 

They can be extremely intensive and a variety of factors will be considered. Therefore, individuals seeking to take advantage of these benefits should schedule a consultation with us and Puerto Rico Tax Experts Etrends for clarity and guidance through the process.

Schedule a Consultation Today

What does $97 a year do to protect you from the IRS in Puerto Rico and on the mainland?

Puerto Rico beach
Photo by Wei Zeng on Unsplash

Just because you are in Puerto Rico doesn't mean you are exempt from U.S. audits. As long as you are a U.S. citizen, you do not escape the eye of the IRS.

Regardless of where you live in the world, you need to file an income tax return with the U.S. as a citizen of the United States. So, going to Puerto Rico doesn't mean you don't have to file a U.S. income tax.

If you make less than 12,000, you don't have to file a tax return. But, if you are still making an income above 12,000 worldwide after subtracting Puerto Rican income, you will have to file a tax return in the U.S. 

Therefore you want assurance that you have crypto representation should you get the dreaded letter from the IRS.  

Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation year-round should you need representation with the IRS.

Protect yourself today with crypto tax audit defense for only $97 for the year! 

Learn More at CryptoTaxAudit.com

The time to take action is now!

Well done! By reading this post, you have already taken the first step toward understanding an excellent solution to protect your crypto earnings in light of the current IRS crackdown on virtual currency. Now you know plenty of reasons why crypto traders should move to Puerto Rico and how.  

You have also come one step closer to having an action plan to realize your dreams of becoming a crypto millionaire when the next potential epic bull run hits.

You are ready to play your cards right. And, clearly see your potential to cash in on millions is right around the corner if you play your cards right by 2021.  

Remember, if you expect to sell crypto and avoid taxes on your earnings in 2021, you cannot wait until the year 2021. You need to act now in 2020.       

Our goal is to help get you in front of this problem/opportunity by using tools like CryptoTaxAudit to provide you with representation should you need it with the IRS.  

Donnelly Tax Law is the leading US tax firm for preparing complex U.S. tax returns for Americans, including crypto traders and people with foreign assets. 

We are currently partnering with the Puerto Rican tax and accounting firm Etrends Group for Act 22 clients. 

Schedule your call todAY

Footnotes

  1. https://www.sovereignman.com/tax/how-you-can-move-to-puerto-rico-and-pay-almost-zero-tax-free-guide-16368/
  2. https://www.dlapiper.com/en/us/insights/publications/2016/08/puerto-ricos-act-20-and-act-22/ 
  3. https://puertorico.etrendsgroup.com/puerto-rico-incentives-code-act-60-2019-signed-into-law/ 
  4. https://www.sovereignman.com/tax/how-you-can-move-to-puerto-rico-and-pay-almost-zero-tax-free-guide-16368/

Introducing Crypto Tax Tools by CryptoTaxAudit

We’ve created Crypto Tax Tools as part of our ongoing mission to help as many crypto owners as possible. See what premiere tutorials are in this toolbox.

The topic of crypto tax can be a scary one, especially with so few resources out there. But it doesn’t have to be. In our ongoing mission to help as many crypto traders as possible, we’ve created Crypto Tax Tools. Think of it as your toolbox if you like, powerfully aiding you in being proactive to file a great crypto tax return. Just how helpful can they be? 

Learn about our premiere video tutorials that are now available, and at a discounted price for members of CryptoTaxAudit.

Consider The Cost of A Bad Crypto Tax Return

Our Crypto Tax Tools are designed to save you money. The video tutorials provided can keep you from having to hire a tax attorney, whose rates range anywhere from $225 to $500 per hour. You’ll find that the vast majority of tax attorneys aren’t even knowledgable about cryptocurrencies and don’t deal with crypto taxes and foreign reporting obligations.

READ MORE: Responding to an IRS Letter of Audit or Examination – What’s Involved

Most important of all, a properly filed crypto tax return can save you the $10,000 penalty fee for not filing the FBAR and other anti-money laundering forms.

Our Crypto Tax Tools Video For Filing the FBAR and Form 8938

Learn how to correctly file your cryptocurrency on the FBAR and form 8938.

This video explains how to file these essential forms, specifically with cryptocurrency activity in mind. It covers: 

  • the requirements of filing the anti-money laundering forms
  • that crypto exchanges are considered to be foreign bank accounts
  • the penalties and cost at risk
  • if you qualify for filing these forms
  • step-by-step instructions on filling out the forms
  • and more

Our Crypto Tax Tools Video For Using TurboTax To File Crypto Tax

Learn how to use TurboTax to report cryptocurrencies on U.S. income tax return.

This video goes way beyond the basic crypto support of TurboTax to explain how to:

  • report mining income
  • claim tax breaks for losses to scams and lost coins
  • file the two anti-money laundering forms required of all crypto traders
  • use a disclosure statement to protect against audits
  • and more

These two video tutorials are just the beginning. Over time, we’ll be adding even more powerful crypto tax tools, from videos to ebooks, and more.

Crypto Tax Tools + CryptoTaxAudit

These videos are prepared by myself, Clinton Donnelly, founder of Donnelly Tax Law and CryptoTaxAudit. I’m one of the leaders in the field of crypto tax reporting and defense and have prepared hundreds of crypto tax returns.

READ MORE: Introducing Crypto Audit Defense with CryptoTaxAudit

On top of saving money with our Crypto Tax Tools, you can have peace of mind when you subscribe to CryptoTaxAudit. As a member, you’ll be protected against crypto tax audits and have access to free resources and ongoing discounted pricing of our Crypto Tax Tools. 

Now as a crypto owner, you can rest assured that you’re safe. 

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You’ll also receive a special discount code for signing up!

Crypto Taxes 2020 – Interview Video with Ivan on Tech

In my interview video with Ivan on Tech, we discuss crypto taxes in 2020. From regulation changes to foreign filing and more, tune in crypto owners.

Taxes in general are a serious topic that is important to handle correctly. Now for crypto traders, it’s become even more serious. Cryptocurrency is becoming a larger presence in our world and with that, more clarity is coming about regarding regulations and especially cryptocurrency taxation. I talk about this and more in my interview video with Ivan on Tech. 

Crypto Taxes 2020 Overview

In this recent interview video with Ivan on Tech, we talk about:

  • the latest regulation changes for US crypto tax reporting
  • foreign filing obligations
  • how the IRS thinks and will go after crypto traders
  • crypto reporting tools
  • crypto audit protection
  • true-life stories and examples
  • and more

A Sneak Peek of Crypto Taxes 2020 Interview Video

crypto tax return

IVAN: What kind of news is the latest when it comes to US crypto tax reporting?

CLINTON: There is now a question about cryptocurrency on the US tax form 1040 that every tax payer has to answer. It ask, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?“.

Everybody has to answer that, which is significant because when you sign a tax return, it’s signed with an oath that is under penalty of perjury. Answer that incorrectly and you’re committing a felony. 

IVAN: Should everyone with crypto be concerned with the tax authorities? 

CLINTON: Yes. The IRS considers crypto traders to be low-hanging fruit. It’s a branch of the government that wants to make money. 

GET MY EBOOK: Why Crypto Traders Are Low-Hanging Fruit For The IRS

Watch Crypto Taxes 2020 Interview With Ivan On Tech

For help with your crypto taxes, schedule a consultation today.

To learn more about our latest crypto tax service visit

Get Our Newsletter

Get my bi-weekly newsletter with helpful tax resources and keep us at hand in case you ever need our help.
You’ll also receive a special discount code for signing up!