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The Ultimate Guide to Puerto Rico Crypto Tax

Learn everything you need to know about Puerto Rico crypto tax incentives and why American crypto traders should move to Puerto Rico.

Attention American crypto whales: Puerto Rico crypto tax benefits should be on your radar and here’s why:

You are a young, single, 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.

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 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 tax bill.

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

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now, and let’s say you move to Puerto Rico today and expect them to get much higher.

Suppose you wait until bitcoin hits $100,000. All the gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico.

Therefore, the gains in your crypto up until that date are still taxed by the US when sold.

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.

Let’s put this all together.

If you had a Bitcoin, you bought in 2019 and then sold in 2022 after you’ve become a Puerto Rican resident, part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.

You want to move to Puerto Rico before your coins go to the moon!

We will explain why crypto traders are moving 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 The Fantastic Opportunity For Puerto Rico Crypto Tax Savings

The chances are high that you’ve heard about the fantastic opportunity for US 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 tax bill.

And you are beginning to see that the tax-free benefits of that big crypto cash out 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 Puerto Rico Crypto Tax To Save Money On My Crypto Taxes In 2021 And Beyond

How Do I Save Money On My Crypto Tax Bill?

If you’re looking to save money on your tax bill, you might want to consider relocating to Puerto Rico as soon as possible.

There is no tax benefit until you arrive.

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.

We know that saving money on your taxes is about one of the most substantial risk-adjusted returns.

When is the best time to move to benefit from Puerto Rico Crypto Tax?

The best time to move is before your cryptos go up. You want the gains to increase as you are in Puerto Rico.

Your cryptos have a gain as of now.

Let’s say you move to Puerto Rico today and expect them to get much higher.

Suppose you wait until bitcoin hits $100,000 then all that gain is taxed at US tax rates.

If you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act now to establish your bona fide residency.

The date you enter Puerto Rico later becomes the date you are considered a bona fide resident of Puerto Rico.

Therefore, the gains in your crypto up until that date are still taxed by the US when sold.

After that date, the gains in your cryptos are considered Puerto Rican sourced income and taxed at a 0% capital gains rate.

Let’s put this all together.

If you had a Bitcoin, you bought in 2019.

And then sold in 2022 after you’ve become a Puerto Rican resident.

Part of the gain is taxable by the US, and the rest of the gain is taxed by Puerto Rico.

You want to move to Puerto Rico before your coins go to the moon!

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. 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.” Later, we talk about making closer connections to Puerto Rico than the United States.

Why Should You 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 unique tax status.

It is a US territory, but it is viewed as a “foreign country” for US federal income tax purposes.

Therefore, an individual tax applies to its residents and tax incentives geared to promote its economic development that may be very luring for US 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 becomes 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. It is 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.

It intended 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 Puerto Rico resident 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 establishing residence in Puerto Rico.

We asked Juan Robles, CPA Partner Etrends Group, about these special rules.

Robles states that:

“Any appreciated property acquired in the US and later sold while a PR resident 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)”

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, 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.

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.

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 source income earned by US citizen or resident alien is excluded from US taxes (US Code Section 933 exclusion)”

-Juan Robles, CPA Partner Etrends Group

“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 On My Puerto Rico Crypto Tax A Reality.

What Is The First Action Step To Take?

The first and most critical step 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 to save on your tax bill.

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

They must thoroughly understand residency compliance and form a closer connection to Puerto Rico than to the US For more information, consult the Etrends Group in Puerto Rico.

How Can You Prepare For This Move To Puerto Rico?

You must become 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.

How Long Do You Have To Live In Puerto Rico To Be A Bona Fide Resident?

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 will take this step, so be sure to position yourself with the right team of Crypto Tax Law and Puerto Rico tax experts from the start. You also have to do the paperwork, applying with the tax authority there.

An Act 22 Decree application 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 US 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 the US IRC’s purposes 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.”

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

Again, you must generally 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 Puerto Rico.

How Do I Create Closer Connections To Puerto Rico?

For example,

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

There are various factors that the individual must meet to qualify as a “bona fide resident of Puerto Rico.”

They can be extraordinarily intensive, and a variety of factors will be considered.

Therefore, individuals seeking to take advantage of these benefits should consult with our Crypto Tax Specialist, Clinton Donnelly, and Puerto Rico Tax Experts Etrends for clarity and guidance.

What Is Law 40-2020?

On April 16 Puerto Rico Governor Wanda Vazquez approved, Law 40-2020, that alters the way tax incentives are provided to new residents. The previous annual fee of $300 for those who moved to the island and applied for the incentive has been substantially increased. It has now jumped up to $5,000. A new tax contribution deduction is equal to 3% for anyone who earns $100,000 or less. (5)

“There is some lobbying going on related to the increase of the filing fee charge. As it stands today (May 25, 2020), it applies to all Act 22 holders.

The additional 3% income tax reductions apply to tax years 2020 and forward.” – Juan Robles, CPA Partner Etrends Group

To summarize total costs, including Law 40-2020:

Now, for anyone wishing to move to the island, the upfront expenses are much higher, somewhat negating the existing tax incentives. There is a $750 filing fee, a $5,000 “special fund fee” if the filing application is approved, a $10,000 obligatory annual contribution (with the possibility of having the fee made in two payments), and the new $5,000 fee. (5)

On the bright side, conditions for Act 20, known as the Export Services Act–now part of Chapter 3, Incentives for Export Services– remained largely the same. (1)

Under the new rules, If your Act 20 company churns $3,000,000 (or more) of revenue a year, you will need to employ a full-time employee in Puerto Rico. And that single employee can be you actively managing your business. (1)

What Does A Membership Do To Protect You From The IRS In Puerto Rico And On The Mainland?

Just because you are in Puerto Rico doesn’t mean you are exempt from US audits. As long as you are a US 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 US as a citizen of the United States. Going to Puerto Rico doesn’t mean you don’t have to file a US 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 US.

Therefore, you want assurance that you have crypto representation should you get the IRS’s dreaded letter.

Our goal is to help get you in front of this problem/opportunity by using annual tools like CryptoTaxAudit to provide you with representation as long as you are a member should you need representation with the IRS.

What If You Had The Best Crypto Defense Available And It Was All Prepaid?

Find out more about Crypto Tax Audit Services.

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 future Crypto earnings in light of the current IRS crackdown on Crypto earnings.

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.

Your potential to cash in on millions is right around the corner if you play your cards right.

Remember, if you expect to sell crypto and avoid taxes on your earnings, you cannot wait until the end of the taxable year. You need to act by July 2 to get your 183 days in Puerto Rico.

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

Donnelly Tax Law is the leading US tax firm for preparing complex US tax returns for Americans, including Crypto Traders and people with foreign assets.

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

Footnotes:

Crypto Owners Terrified Of New 1040 Tax Question

Crypto Owners are terrified of the new Form 1040 tax question. Find out what you need to know and how you can start taking action to protect yourself today.

Crypto owners are shocked to see that the IRS has revised the 1040 tax form for 2020 to include the question:

“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? Yes or No”. 1

This question appears on the top of Form 1040 immediately after your name and address.

Every taxpayer must answer this question, and it is causing a lot of fear.

The IRS had a similar question in 2019 on Schedule 1 of Form 1040.

However, only taxpayers filing Schedule 1 had to answer the question.

Neither The Tax Law Nor The IRS Regulations Have Defined Virtual Currency For Crypto Owners

Virtual currency is not defined in the tax law nor the IRS regulations.

The IRS started using the term virtual currency in 2014. 2

The new 2020 Form 1040 Instructions explain:

“Virtual currency is a digital representation of value, other than a representation of the U.S. dollar or a foreign currency (“real currency”), that functions as a unit of account, a store of value, or a medium of exchange…. Regardless of the label applied, if a particular asset has the characteristics of virtual currency, it will be treated as virtual currency for Federal income tax purposes.” 3

This definition classifies all cryptocurrencies as virtual currency.

Are there other fish caught in this net?

You bet there are!

And it is vital that all crypto owners understand a crucial point when it comes to how the IRS defines cryptocurrency.

What All Crypto Owners Should Know About The IRS Definition Of Virtual Currency

The same definition the IRS is classifying for cryptocurrencies also classifies: frequent flyer miles, grocery store loyalty cards, and credit card reward points are all forms of a digital representation of a store of value.

These are all forms of virtual currency.

What Do These Various Forms Of Virtual Currency Mean For Crypto Owners?

Almost every taxpayer has a financial interest in some form of virtual currency, by the IRS definition.

Meaning, almost everyone should answer YES to this question, even if you don’t own cryptocurrencies.

By elevating the virtual currency question to the start of Form 1040, it is causing crypto owners a lot of fear. When you sign your tax return, you are swearing:

“Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

Why Is Answering The New Form 1040 Question Terrifying Crypto Owners?

If you answer the virtual currency question falsely, you could be charged with perjury.

Lawyers call this a “perjury trap.”

Yet, most observers feel the IRS has not provided adequate guidance for taxpayers to know how to report their cryptocurrency income, especially in light of DeFi innovations.

The Government Accounting Office (GAO) asserted that the IRS could do more to help taxpayers comply. 4

Is There More Than One Perjury Trap For Crypto Owners?

Yes, there is!

Another perjury trap is question 7a on Schedule B of Form 1040, which asks:

“At any time during 2020, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions Yes or No.” 5

Foreign crypto exchanges appear to qualify as a financial account described in this question. 6

In February 2020, the same GAO report recommended that the IRS & FinCEN make a statement about applying foreign account reporting requirements to virtual currency.

FinCEN agreed with this recommendation.

What did the IRS do?

The IRS had no comment.

Where Is All The Much-Needed Regulation For Crypto Owners?

As of today, December 16, 2020, neither FinCEN nor the IRS have provided additional guidance.

However, the absence of guidance for crypto owners is not a valid excuse for failing to obey the law – ignorantia juris non excusat.

What Does Failure To Report Foreign Accounts Mean For Crypto Owners?

Failure to report foreign financial accounts when required is a $10,000 penalty per account per year.

The conservative approach is for a taxpayer to report foreign crypto accounts on the FBAR FinCEN Form 114 and IRS Form 8938 (FATCA).

"Crypto Tax Tip: there is little downside to overreporting on anti-money laundering forms: FBAR FinCEN Form 114 and IRS Form 8938 (FATCA)."

- Clinton Donnelly Tweet

The escalation of the virtual currency question without adequate IRS guidance is causing taxpayers to be anxious.

Many crypto owners are asking if they need to fix past tax returns.

Donnelly Tax Law Has Solutions For Crypto Owners, No Matter What Your Budget

The IRS is already cracking down on crypto owners, and we have solutions available to empower all crypto owners, no matter what your budget.

Everything Crypto Owners Need To Amend And File Past Crypto Tax Returns

You can learn how to amend and file your past crypto tax returns with our downloadable examples and templates using the Crypto Tax Fixer package.

Crypto Owners can bulletproof their crypto tax returns to protect themselves from the IRS by scheduling a one-on-one appointment to discuss your crypto tax situation.

A good crypto tax return involves not just general tax preparation skills; you have to have accounting skills to do the reconciliation of all the trades.

A good crypto tax preparer also needs to have legal skills because the anti-money laundering forms are law-oriented.

When we do a tax return at Donnelly Tax Law, we call it a bulletproof crypto tax return.

Not only do we report all the income, but we also report all the anti-money laundering forms.

We report any Ponzi scams or financial scams where you lost money because you can itemize the loss and reduce your taxes.

If you have ICOs and dead coins and junk coins that went nothing, we can declare a loss on those and bring in some savings.

For most clients who come to me, we have to go back and fix a couple of years’ worth of returns.

So we do a tax amnesty form.

Because if you report the anti-money laundering forms after the deadline, which is the same day as taxes are due, it’s a $10,000 penalty.

Schedule a one-to-one consultation today at Donnelly Tax Law.

Crypto Tax Audit Defense Membership Is The Best Investment For At-risk Crypto Owners

If you are a crypto owner and haven’t protected your most significant bullish assets with crypto tax audit defense, give us this opportunity to enlighten you with just three reasons why you should.

No crypto tax return is too complicated.

We’ve got your back.

1 Draft 2020 Form 1040 <https://www.irs.gov/pub/irs-dft/f1040–dft.pdf > released August 18, 2020.

2 IRS Notice 2014-21 < https://www.irs.gov/pub/irs-drop/n-14-21.pdf>

3 Draft 1040 Instructions < https://www.irs.gov/pub/irs-pdf/i1040gi.pdf >, released December 15, 2020, p 15.

4 GAO, “Virtual Currencies: Additional Information reporting and Clarified Guidance Could Improve Tax Compliance. < https://www.gao.gov/products/gao-20-188 >2/12/2000, GAO-20-188

5 Schedule B < https://www.irs.gov/pub/irs-pdf/f1040sb.pdf>

6 18 CFR 1010.350 (c)(3)

3 Reasons Why Crypto Traders Should Have Crypto Tax Audit Defense

Crypto Tax Audit Defense Membership is the best investment for your crypto assets if you are at risk with the IRS. Find out why most medium-to-large crypto traders are.

This post has been moved to our CryptoTaxAudit blog.

The Long And The Short Of Crypto Capital Gains Taxes

Learn which crypto capital gains tax is the most significant tax break in the federal tax code for crypto owners.

Did you know that one of the most significant tax breaks in the federal tax code is the long-term capital gains tax rate on property? 1

And for the record, cryptocurrencies are considered property.

So if you are a crypto owner, that probably got your attention.

Heading into 2021, you’ll be yearning for more transparent tax regulations to guide you through your crypto investments.

Well, I’ve got one for you.

Today, I will discuss the long and short-term effects of capital gains taxes for your virtual currency.

What Are Crypto Capital Gains Taxes?

When you sell property (cryptocurrencies), the price you sold it for minus the price you paid for it is called the gain. In contrast, it is called a loss when the gain is negative.

For tax calculations, all your gains and losses are added together to get the net gain.

The good news is that Congress rewards investors by taxing long-term gains at a much lower tax rate to encourage long-term investing.

So what are those anyway?

What Are Long-Term Crypto Capital Gains Taxes?

If you own property for over a year before you sell it, it becomes a long term investment. Property sold before the year is up is called short-term investments or gains.

How Are Short-Term Crypto Capital Gains Taxed?

All the short-term gains and losses are combined to get the net short-term gain. Short-term gains are taxed as ordinary income at your marginal tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%).

How Are Long-Term Crypto Capital Gains Taxed?

All the long-term gains and losses are combined to get the net long-term gain. Long-term gains are taxed at a special rate (0%, 15%, or 20%).

When You Have Negative Crypto Capital Gains Taxes (Net Losses), How Is It Taxed?

When net short-term gains and net long-term gains are added together, resulting in a negative amount (net loss), a special tax rule kicks in. A taxpayer can only claim $3000 of loss on their tax return. The remainder is carried over or saved for the next year to offset future gains.

The silver lining here is that the $3000 of loss reduces taxable income and thus your taxes.

When Do I Qualify For A 0% Crypto Capital Gains Tax Rate?

If your taxable income (your income after deductions) is zero or in the lowest tax bracket (10%), then the first $54,100 of net long-term capital gains if single, or $80,800 if married, is taxed at 0% long-term capital gains.

Please take note: these rates I am discussing are the 2021 rates.

When Am I Subject To The 20% Crypto Capital Gains Tax Rate?

Almost everyone else enjoys the 15% long-term capital gains tax rate. However, if your taxable income puts you into the highest tax bracket of 37%, your long-term capital gains tax rate increases to 20%. The 37% tax for 2021 starts when income exceeds $523,600 if single or $628,300 for married filing jointly.

Wait, there’s more and something for the medium to large investors to be aware of…

What Is The Net Investment Income Tax?

As a part of the Obamacare tax, taxpayers with capital gains (passive) income above $200,000 (single) or $250,000 (married) also are subject to the Net Investment Income Tax (NIIT).

NIIT is an additional 3.8% tax on the passive income over the thresholds.

A Final Note For Medium To Large Crypto Owners

One last note, If you expect to have crypto assets worth over $150,000, you may want to consider our CryptoTaxAudit Defense Membership a good investment for you.

Be sure to keep up-to-date with our emails. We will continue to have some insight that you should consider for protecting yourself against an IRS examination.

1 IRS 2014-21

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Let’s Talk About TurboTax And Tax Compliance For Crypto Whales

Learn how TurboTax and other tax programs fall short with crypto audit protection and how crypto whales get compliant with back crypto taxes.

This post has been moved to our CryptoTaxAudit blog.

Why Is A Good Crypto Tax Preparer So Hard To Find?

Find out why you can blame Congress for needing an excellent crypto tax preparer and what the cost might be for not having one.

Have you found the road to find a good crypto tax preparer, a long and windy one?

Maybe you’ve got a ton of crypto and your current tax preparer hasn’t been keeping up with your needs.

And maybe the few tax preparers that have had some answers seemingly charge well above and beyond the others. Why is that?

You aren’t alone in your line of thought.

In an interview with Charlie Shrem on his podcast, Untold Stories in February 2020, Shrem asked a powerful, pointed question: Why are good crypto tax preparers so hard to find?

I’ll tell you why.

A good crypto tax return involves not just general tax preparation skills; you have to have accounting skills to do the reconciliation of all the trades.
A good crypto tax preparer also needs to have legal skills because the anti-money laundering forms are very much law-oriented.

When we do a tax return at Donnelly Tax Law, we call it a bulletproof crypto tax return.

Not only do we report all the income, but we also report all the anti-money laundering forms.
We report any Ponzi scams or financial scams where you lost money because you can itemize the loss and reduce your taxes.
If you have ICOs and dead coins and junk coins that went nothing, we can declare a loss on those and bring in some savings.

For most clients who come to me, we have to go back and fix a couple of years’ worth of returns. So we do a tax amnesty form.

Because if you report the anti-money laundering forms after the deadline, which is the same day as taxes are due, it’s a $10,000 penalty.

It’s a $10,000 penalty on the FBAR and the Form 8938, and for each year, that’s $40,000 with a penalty. We can avoid it with tax amnesty, so it’s a law thing.

In the current state of crypto taxation, you need a crypto tax law firm, or you are falling short in one way or another.

Crypto Penalties Can Be High If You Don't Have A Good Crypto Tax Preparer

In that same podcast interview on Untold Stories with Charlie Shrem, he made another bold observation.

Shrem stated, “Penalties are high too. I know traders who honestly went back and paid tens of thousands of dollars in penalties just because they messed up how they reported it or the number was not correct or whatever.

So penalties are a real thing; it’s not a few hundred bucks. It’s like a significant amount of money.”

And he was correct.

The IRS will audit crypto traders, and when they do, it’s primarily going to be because of violations of the anti-money laundering regulations. It’s not going to be because you didn’t add up 15,000 trades correctly.

Shrem then asked, What are the top three regulations you think the IRS will go after?

Why Does Nearly Every Crypto Trader Have A Schedule B Problem Without A Good Crypto Tax Preparer?

I would say virtually every crypto trader has what I call a schedule B problem with

Schedule B on your tax return is the one where you list your interest and your dividend income. And at the very bottom, it has this question in part three which says:

“Did you have a financial interest in or signature authority over a financial account in a foreign country?” “Yes” or “No”.

Now, of course, Binance in Malta or whatever country it’s in, that’s a financial account in a foreign country; it would be hard to say it wasn’t.

So most people said “No” to that question.

Almost everybody says “No” to that question because US tax preparers never deal with people who have foreign assets.

After all, the US is so big. Everybody has all their bank accounts in the US, so everybody checks “No” or leaves it “Blank”.

Are Crypto Traders Required To File The FBAR Form?

The next question after that is, “Are crypto traders required to file the FBAR form?”

Shrem commented that opening an overseas bank account is something he avoids for this specific reason. He says he doesn’t need one and doesn’t want to deal with more compliance.

I told Shrem to open up his tax return, look for schedule B, look at the bottom, and see if he answered “Yes” or “No” to those questions.

And I challenge you to do the same.

Everyone should look at their past tax returns and look at schedule B at the bottom; it says, Did you “Yes” or “No” have a foreign financial account?

And then, the next question is, if you answer “Yes,” Are you required to file a FinCEN form 114 FBAR? Please see the instructions in the form, “Yes” or “No?”

Now, this has gone to the US Supreme Court, and the US Supreme Court has said that that question, as worded, has been in there for around 15 years, and it is sufficiently instructive that every taxpayer is under obligation to file an FBAR report.

People cannot use the excuse, “I didn’t know”. “I didn’t have to.”

The fact of the matter is we can get away with tax amnesty on that argument, but if they take you to court, they can nail you against the wall.

This question is how crypto traders will get taken down because they’re all going to say “No” to that, and this is very black and white.

There’s no “Well, I don’t have all the transaction records,” and there are no excuses or a song and dance. It’s black and white.

You said, “No,” or you left that “Blank” when you should have said, “Yes,”. You’re nailed; there’s no further discussion.

Plus, since that part is a Title 18, the Bank Secrecy Act, they can go immediately to prosecution for perjury for not answering yes.

When you sign your tax return, it says, “Under penalty of perjury, I affirmed that I have read my tax return, and I agree that it is true, complete and correct”.

And then you’ll sign your name. That’s what happens when you sign a tax return, which means that’s perjury.

This Question Is A Schedule B Problem For Crypto Traders, So How Do You Fix That?

We do the tax amnesty; we file the FBAR form and Form 8938. And Form 8938 is where you define foreign assets.

How Does The US Government Define Foreign Assets?

The internal revenue code section 6038D says, “A foreign asset is any financial instrument or contract for investment purposes where the counterparty is not a US Person”.

Hey, look, the beauty of an exchange, even a US exchange like Coinbase, is you don’t have to know who you’re trading with. You may very well have been trading with terrorists from Syria; you have no idea even on Coinbase.

Why Is Tax Law So Complicated?

Shrem had a question, and he wanted to preface it with a little analogy.

“If I own a large farm and have multiple farmers leasing my farm, and the deal is that they have to pay me a percentage of their revenue based on how many clouds are in the sky. If it’s a non-sunny day, then their share of what they have to pay me is less.

Let’s say it would be in my best interest, and I would be super highly incentivized to build a system to make it as easy and simple and without any loopholes or without any complications for those farmers to report that.

Now, did you ever think at some point in the last 10 or 20 years, the IRS would say hey, maybe the reason that people don’t like us is that we’re so complicated to interface with?

Maybe people don’t like us because no one likes paying taxes, but it’s something that you’re born knowing that you have to do.

So why not make it simpler right?

Now I’m not talking about tax law; I’m talking about filing your taxes.

And then you have this behemoth like TurboTax; it is the only one, and then even there, it kind of sucks. Why hasn’t this been done better? Why hasn’t this been simplified?”

We Can't Blame The IRS For Needing A Good Crypto Tax Preparer; Blame Congress!

The truth is we can’t blame the IRS for this; the blame is on Congress. Congress writes the laws; Congress makes everything complicated; it works this way.

You want to have a sensitive tax system that is understanding to people. So if we could say, we had a flat tax. You just described the simplicity of a flat tax, right?

How much money you make, multiply it by 20% and give it to us—flat tax.

And we have that in place right now. It’s called the alternative minimum tax.

But what Congress says is yes, but lower-income people shouldn’t have to pay so much, so let’s have some deductions and incentives, and oh, let’s give them a child tax credit for how many children they have and people with more children need more credit.

Oh yeah, and if you make over a lot of money, maybe you should be paying a bit extra, and we put that in there.

And you listened to every single one of these explanations, and they all sound great, they all sound compassionate and meaningful. But the complexity layered on top of one another and then jiggling them every year twists them a bit and it becomes inconceivable. You cannot understand what’s going on. It becomes too complex.

People come to me and say, “Can you estimate how much I owe in taxes?” I have no idea; I could never estimate it. I mean, the tax law is just so complicated in different ways; everybody has a different situation.

So it’s Congress’ fault that you need an excellent crypto tax preparer.

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Why Is An Old Law Still Relevant For Like-Kind Exchange (LKE)?

Find out why an old law is still relevant for using like-kind exchange (LKE) for crypto returns before the 2018 tax year.

Like-kind exchange (LKE) can still be used for cryptocurrencies for returns before the 2018 tax year (Footnote 1). Returns can be amended to add Form 8824 to report like-kind exchange (LKE) exchange transactions that had never been reported. The purpose of doing this is to avoid the risk of an audit of unreported income and associated penalties and interest. The penalties include a 20-40% accuracy penalty.

Returns that had reported crypto-to-crypto trades on Form 8949 can be amended to reduce tax liabilities or claim refunds for 2017. I have gotten refunds of over $396,000 by doing this for clients.

How did Congress change the like-kind exchange (LKE) law?

In December 2017, Congress passed the TCJA bill, which among many other things, limited the use of like-kind exchange (LKE) to real property like land or buildings.

Why did Congress change section 1031 for like-kind exchange (LKE)?

The like-kind exchange (LKE) section has been in the tax code since 1921, with only minor changes (footnote 2). The purpose of the law was to promote investment by not taxing exchanges unless there was a distribution of gain. For this reason, the courts have taken a liberal view to interpret the laws to the benefit of taxpayers (footnote 3).

In the original version of the 1921 law, property had to be held for at least two years before benefiting tax-deferred exchange. The purpose of the holding period was to differentiate between speculative and investment property (footnote 4). In 1924, the law was changed to require the property to be of like-kind exchange (LKE) to receive deferred tax treatment (footnote 5).

As a result of losses in court, the IRS has issued many administrative rulings to reign in abuse. The Volker Report identified aggressive use of Section 1031 as distorting the financial system leading up to the 2008-2009 financial crisis (footnote 6).

By 2014, several concerns were being raised. The sharp increase in deferred gain reported on Form 8824 meant that too much tax was being avoided by like-kind exchange (LKE). Another ongoing concern is that like-kind exchange (LKE) allowed the investments to grow without tax until the investor died. After that, they could also be transferred tax-free to an inheritor. This last concern became compounded by the rise of cryptocurrencies, which allowed the investor the possibility to never return to fiat and be taxed.

What is the statute of limitations of a crypto tax return?

The statute of limitations is a legal time limit on how long the IRS has to find errors in a tax return. It is a form of taxpayer protection. The primary limit is three years after a return’s filing due date (footnote 7). The second limit is two years after all tax liabilities are paid. This second limit doesn’t affect people who pay off their taxes on the due date.

However, if a return is fraudulent or was a willful attempt not to pay taxes, then there is no statute of limitations. Crypto traders who intentionally didn’t report their crypto gains in 2017 or other years are at risk. The amount of income hidden would have to be significant for the IRS to press this claim.

Another exception is if the unreported income is related to foreign financial assets and is greater than $5000. When this happens, the statute of limitations on auditing is six years (footnote 8). What is a foreign financial asset? An asset is considered foreign when the issuer or counterparty is other than a U.S. person (footnote 9). When you trade on a non-SEC registered crypto exchange, your trades are matched up with an anonymous person whom you can not prove is a U.S. person; therefore, you have to assume that he is not a U.S. person (footnote 10).

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Footnotes

Eli Cole, “Cryptocurrency and the Section 1031 Like Kind Exchange” Hastings Science and Technology Law Journal Winter 2019 10:1, p 102.
Marjorie E. Kornhauser, “Section 1031: We don’t need another hero”, 1987 Southern Cal Law Review 60:397.
Kornhauser, P397
Kornhauser, p418
Bradley T. Bordon and others, “To Repeal or Retain Section 1031: A Tempest in a $6 Billion Teapot”. ABA Taxation News Quarterly 34:1 13 May 2015 < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2603878> accessed 22 Jun 2020, p1.
Bordon p18.
IRC 6501(a)
IRC 6662(j)
IRC 6038D(b)(2)(B)
As of 8/16/2020, I have not heard of the IRS pressing this exception to the Statute of Limitations on crypto tax returns.