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

Coronavirus Relief Package Signed Into Law – More to Come

The Families First Coronavirus Response Act (H.R. 6201) has been signed into law to provide Coronavirus relief to many. Read more to learn the latest.

The Families First Coronavirus Response Act (H.R. 6201) is now law, and attorneys, accountants, and other professionals are poring over it. What are its main provisions, and how might this coronavirus relief affect you?

The Society for Human Resource Management and other outlets have highlighted the following provisions:

Paid Family Leave From Coronavirus Relief

The law provides 12 weeks of qualifying family and medical leave at two-thirds of their salary when employees can’t work because their minor child’s school or child care service is closed due to a public health emergency.

Those on the payroll for at least 30 calendar days are eligible. Benefits are capped at $200 a day (or $10,000 total) and expire at the end of the year.

Paid Sick Leave From Coronavirus Relief

sick leave

Employers have to provide 80 hours of paid-sick-leave benefits in various scenarios, including a situation in which an employee has been ordered by the government to quarantine or isolate or has been advised by a health care provider to self-quarantine. The payment is capped at $511 a day and expires at year-end.

Covered employers that are required to offer emergency FMLA or paid sick leave are eligible for refundable tax credits. Employers with fewer than 50 workers can apply for an exemption from providing paid family and medical leave and paid sick leave if it “would jeopardize the viability of the business.” According to the SHRM, “Gig-workers and other self-employed workers will be eligible for a tax credit to cover the benefits.”

A notable exemption is companies with more than 500 employees. The thinking on Capitol Hill was that such companies are capable of providing benefits without direct government help.

Part-Time Workers

Uber driver

They are also covered. According to the New York Times, such employees will receive the amount they typically earn in a two-week period. The self-employed — from freelance writers to Uber drivers — “should calculate their average daily self-employment income for the year, then claim the amount they take as a tax credit (they can reduce their estimated quarterly tax payments in the meantime).

LEARN MORE: The Families First Coronavirus Response Act (H.R. 6201)

Is everyone getting a check?

tax evading

There are a lot of rumors floating around about everyone getting a relief check. The government is still working on who gets a check and how much — and how to get the money to everyone who is eligible. As these proposals take a more solid form, we’ll have more details.

For now, keep in mind that the legal situation can change as quickly as the health situation, and ruling and reinterpretations of laws can change suddenly, modifying the advice in this article. We’ll be keeping an eye on authoritative sources in the coming days.

© 2020

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

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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
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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/

IRS Offers Identity Protection PIN

The IRS is gradually rolling out a new identity protection program that prevents anyone who has stolen your Social Security from misusing it. Learn more.

Identity protection is of even more concern these days when it comes to taxes. The IRS can now give eligible taxpayers an “IP PIN,” a six-digit code to help prevent the misuse of Social Security numbers on fraudulent federal income tax returns. As the IRS explains, this PIN helps the agency verify a taxpayer’s identity and accept his or her electronic or paper tax return.

Who's Eligible For The Identity Protection PIN

telecommuting

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Not everyone can get one yet. If you are a confirmed victim of identity theft and the IRS has resolved your tax account issues, the agency will mail you a CP01A Notice with your IP PIN.

Also, to be eligible for 2020, you must have filed a federal return last year as a resident of Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas or Washington. This is as of February; the list will grow in the future.

Taxpayers eligible for the IP PIN Opt-In Program must use the online Get an IP PIN tool, explains the IRS. If you do not already have an account on irs.gov, you must register to validate your identity. Before attempting to register, read about the secure access identity authentication process. Taxpayers cannot obtain an IP PIN by calling the IRS.

How Do You Use An IP PIN?

identity protection

Photo by Kaitlyn Baker on Unsplash

Enter the six-digit IP PIN when prompted by your tax software product or provide it to your trusted tax professional preparing your tax return. An incorrect or missing IP PIN will result in the rejection of your e-filed return or a delay of your paper return until it can be verified.

Do not reveal your IP PIN to anyone. It should be disclosed only to your tax professional and only when you are ready to sign and submit your return. The IRS will never ask for your IP PIN. Avoid phone, email or text scams trying to trick you into revealing your IP PIN.

For more details on using the IP PIN and the latest updates, go to the IRS IP PIN page. It also contains a FAQ that answers the most common questions.

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Getting Ready for Tax Time

Tax time doesn’t have to be stressful. These three tips will help you get your tax preparer what they need in plenty of time for April 15th.

That’s right… it’s tax time! What can you do now before you provide your documents to your tax preparer? With a bit of forethought and preparation, you can make this year’s taxes go as smoothly as possible.

Actually, there’s no grand secret to filing taxes in an easy and efficient manner; it’s simply a matter of setting a system of organization and sticking to it. An old shoebox, while compact and useful, is not the most effective system for holding your financial information in an easy-to-access manner.

Here at Donnelly Tax Law, we help you gather your documents into our secure file system from wherever you are in the world.

Tax Time Tip 1 - Keeping Track of Receipts

tax time

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Even if you don’t get a single write-off for receipts, it’s well worth your time to keep them in logical order. There are plenty of programs that let you scan receipts and organize them on a computer or tablet. Or if you don’t like a digital system, a notebook and glue stick can work.

The benefits of keeping receipts are twofold: You can find any receipts if they’re eligible for tax purposes and you’ll have the receipt if something breaks.

Tax Time Tip 2 - File Paystubs and Invoices

It’s worth getting slightly more technical if you’re going to take your taxes seriously. When you end up paying an unusually large tax bill or receiving a large return, you need to find out what caused it. You’ll usually discover that the withholding was off all year.

Check the IRS tax withholding tables. If you leave your W-4 as is, you can wind up withholding too little, which can bring penalties. Track your income and the tax that comes out on a monthly basis. This information is right on your paystub. Put it into an Excel file and compare it to the tax bracket and rate you should be paying. This will prevent nasty shocks — you’ll be able to adjust withholding early to avoid a larger, year-end discrepancy between what you should have been paying and what you were paying. File a new W-4 to make changes.

This is especially important this year, as the IRS has issued a radically new Form W-4. Filling out a new one is not mandatory (unless you’re starting a new job), but it may be wise. Be sure to provide a recent paystub so your tax professional can advise you on filling out a new form.

READ MORE: IRS Releases Radically New Form W-4

Tax Time Tip 3 - Life Changes

tax time

Photo by Ross Findon on Unsplash

Did you have a child in the new year? Get married or divorced? There is a whole range of life changes that should automatically prompt you to make tax-related changes, including a marriage, a divorce, the birth of a child, a second job and a new house. These changes will affect you whether you are a regular employee or a contract worker. Be sure to organize all your W-2 and 1099 forms.

There are also new rules on retirement accounts, regarding minimum distributions. Some of these changes could affect your estate plan, as laws have changed regarding inherited retirement plans. So be ready to provide any statements or paperwork you received regarding IRA, 401(k) or similar plans.

Clients of Donnelly Tax Law get our annual Tax Preparation Questionnaire that guides you through these life changes, so that we don’t miss any information that will affect your return.

Make Tax Time Go Smoothly

IRS letter

Photo by Kelly Sikkema on Unsplash

Finally, provide last year’s tax returns as well. This is especially important if you did your own taxes last year, or worked with another preparer.

In the long term, get serious about keeping organized records, watching your withholding, planning your deductions and reviewing your tax return. If you do, when tax season comes each year, it will be more bearable and easier to handle. Prepare your questions and concerns for when the answers to your tax questions surface. Hit the ground running!

© 2020

Relieve Yourself of Tax Time Worry

Even with being organized, tax time can be a stressful and confusing experience to navigate. If you need help and don’t want to do it on your own, Donnelly Tax Law can prepare your taxes for you. Schedule a consultation to get started. 

Featured image by The New York Public Library on Unsplash

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

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. 

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!