Bitcoin Halving: What Are The Tax Considerations?

Learn the tax considerations resulting from Bitcoin halving and who they are affecting most. Get significant crypto tax lessons traders learned from 2017.

It’s that time again—a planned Bitcoin event reducing Bitcoin miner’s rewards in half, hence the name, Bitcoin halving.  

We’ve been here twice before, but for something so predictable in many ways, Bitcoin halving hasn’t gotten any less exhilarating for the crypto community.

This is the third halving with dozens more to come. 

There’s no cryptocurrency mystery surrounding the Bitcoin halvings themselves – they happen automatically with no action required by anyone. 

The forecasts have been all over the board. The predictions outlandish, and the disagreements have ranged from the rise and fall of Bitcoin (and everything in between). 

There has been a collection of arguments for why this time is different from doubts in two data points being able to establish a pattern to various structural or fundamental underpinnings that have changed over time. 

But we at Donnelly Tax Law are not in the business of predictions; we are in the business of taxes.

So, we left the predictions to the relative experts and have had them explain what the point of Bitcoin Halving is and how it works.  

“The 2020 halving, the third in the network’s history, means the mining reward has now been reduced from 12.5 bitcoin per block to 6.25 units. It went down to 25 from 50 bitcoin per block in November 2012 and further decreased to 12.5 units in July 2016.” – Coindesk.com

What's the point of Bitcoin halving?

Bitcoin halving

The point of Bitcoin halving as shared by the experts at Bloomberg.com:

  • Bitcoin’s issuance is limited in several ways. 
  • For one thing, according to its founding protocol, just 21 million Bitcoin will ever be in circulation. That’s appealing to many who fear that fiat money – the kind issued by governments – can lose its value to inflation if too much is printed. 
  • Supporters argue that Bitcoin, by contrast, will be guaranteed to increase. 
  • Halving also prevents inflation by acting to periodically slow the pace at which Bitcoins are created so as not to outstrip demand.
  • To other observers, halvings can serve as a hurry-up-and-buy signal by suggesting that a bump in price could accompany slower growth.
    [
    1]

How does the Bitcoin halving affect price?

Bitcoin halving

How Bitcoin halving affects price as shared by the experts at Forbes.com:

  • Michael Dubrovsky, cofounder of the mining company PoWx sheds light on how the Bitcoin halving impacts price, “The theory is that there will be less Bitcoin available to buy if miners have less to sell.” So, from a supply-demand perspective:
  • If Bitcoin supply decreases and the demand for Bitcoin stays the same, then the price of Bitcoin will increase.
  • If Bitcoin supply decreases and the demand for Bitcoin increases (ie. Institutional investors, millennials, or boomers, etc. looking to capitalize on the hype increases), then the price of Bitcoin will see a significant increase in price.
    [2]

What are the tax considerations of the Bitcoin halving?

backup withholding

The tax considerations of Bitcoin halving as shared by our expert Crypto Tax Fixer, Clinton Donnelly at DonnellyTaxLaw.com:

Income tax is only assessed on the gains and income of cryptos. So the halving effects different crypto owners differently.

Who does the Bitcoin halving affect?

The halving affects the miners the most. It changes the profitability of their company.

To continue mining, most miners have to buy new mining equipment. However, the tax laws favor writing off the cost of new equipment in the year you purchase it, which can create significant short-term tax benefits.

If you are a miner, your income goes down, so it makes it harder to have a profitable business. But an unprofitable business can offset income in other areas of your life.

Mining companies may be eligible for some emergency economic stimulus because of the costs of operating a mining farm.

Hodlrs are not affected by the halving. It promises a rapid rise in the price of Bitcoin and other coins. But there is no tax consequence until you trade one coin for another coin or for fiat.

Active crypto traders are not affected by the halving other than the hope of having more substantial profits in the future.

What tax lessons have we already learned?

One crucial lesson active traders learned from 2017 is that it's imperative to save money to pay the taxes on net gains as you make crypto to crypto trades where a profit is made.

One way to do that is by using a crypto gain calculation service like:

These tools can help you track your cumulative gains and losses as you come into the end of the year. This tracking will help you plan on how much to save for taxes.

If the market does go up significantly this year, using these tools can help you with tax harvesting techniques.

Harvesting techniques are merely cashing out the losing coins to offset your tax gains during the year. 

To get crypto tax help for your particular situation, schedule an appointment with Donnelly Tax Law.  

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How The IRS Will Use Anti-Money Laundering Forms To Come After Crypto – Part 2 of Charlie Shrem Interview Video (Transcribed)

Crypto tax expert Clinton Donnelly and crypto influencer Charlie Shrem discuss how the IRS uses anti-money laundering forms to come after crypto traders.

In part 2 of our multi-transcription series with Charlie Shrem, Clinton and Charlie discuss the accuracy of a crypto tax return and how the IRS will use anti-money laundering forms to come after crypto traders.  

Read my e-book, the Basics of Crypto Taxes, to learn how cryptos need to be reported on anti-money laundering forms.

Can your crypto tax return ever be 100% perfect and accurate?

[Charlie Shrem]: Is that physically possible?  Can your crypto tax return ever be 100% perfect and accurate?

[Clinton Donnelly]: A tax return is not like your high school math test where you’re trying to get a 100.

[Charlie Shrem]: Oh man, this is a great sound bite. That’s the first time I’ve ever heard anyone say that.

[Clinton Donnelly]: You just want to be close.

[Charlie Shrem]: Fuck, brilliant.

[Clinton Donnelly]: You want to be close.

[Charlie Shrem]: Honest, right?

[Clinton Donnelly]: Yeah.

"You want just to be honest, have integrity. That's what I've always tried to do with my tax returns."

- Charlie Shrem, Untold Stories Tweet

[Clinton Donnelly]: Hey look, the IRS auditors are under quotas. 

I had a former IRS auditor work for me, and he said they have monthly quotas that they have to go after. 

They have penalties that help them hit it, but if you’re pretty close, and they know they’re going to lose, they don’t want to waste time on you. They want to move on to the next bigger guy.

“Most people think the IRS is going to audit a tax return by going through that long list of transactions to see if you calculated it right, you know FIFO, LIFO, and all that. That's not at all how they're going to do it."

[Charlie Shrem]: What are they looking for? 

Are they looking for someone who intentionally lied about a holding and then had an exchange account overseas and didn’t report it?

Or are they looking for someone who reported $60,000 in income instead of reporting $100,000 by mistake, and just not going back and fixing it?

Can an auditor read the tax return and say, okay, maybe this guy or girl made a mistake?

Or do they read a tax return and say no, this guy was intentionally dishonest?

[Clinton Donnelly]: The IRS is in the business of compliance. In what we’ve seen in their public statements, they want to go after the criminals okay. They have those blockchain analysis tools because then they can go after who was doing the dealings.

But if you’re just an honest guy, a regular crypto trader who’s a large fish and didn’t know how to do your tax return correctly or your preparer didn’t know, the approach on that is different.  

It comes down to how the IRS can prosecute a law case. 

If they look at your crypto reporting and how you made these trades, there are a whole bunch of  “taxpayer’s rights” procedures in the law, and they have to do appeals and send letters and stuff.

READ MORE: How Are Cryptos Reported On Anti-Money Laundering Forms?

"If they use the anti-money laundering laws, they use a different section of the code. It's not a part of the tax code even though the IRS manages it; it is Title 18 of the Bank Secrecy Act. And from that, they can immediately go to prosecution and penalties. So, it's much easier. That's the way they're going to come after you."

[Charlie Shrem]: What people don’t realize is when I got arrested in 2014, I got arrested by an IRS special agent. 

And, we went on to being on pretty good terms over the years. 

I try to have respect for people that are just doing their job.

So, with the IRS anti-money laundering, there’s a huge overlap there, and so what you’re saying is important. 

What type of things are they looking for? 

For my crime, there was a money transmission, and there was a company that I owned that wasn’t tax-related.

READ MORE: Why Crypto Traders Are Low-Hanging Fruit For The IRS

What are some crypto tax-related things that the IRS is looking for when it comes to anti-money laundering?

crypto tax return

[Charlie Shrem]: Because it seems like that’s something people should look out for at the top.

[Clinton Donnelly]: The first one is the major anti-money laundering law, called the Bank Secrecy Act 1990. 

It created an organization called the Financial Crimes Enforcement Network, lovingly known as FinCEN, and they’re the ones that develop the regulations that all banks, brokerage houses, money lending, money service businesses have to follow.

“And it's the FinCEN violations that got you, Charlie. They applied FinCEN regulations against cryptocurrencies, and it's surprising. I'm shocked how much denial traders have, and even tax preparers have that crypto people have to report anti-money laundering. Some of them don't even think it's cash or that it's a financial asset.”

But for an individual, you have to report FinCEN form 114, which is most commonly endearingly called the FBAR, the Financial Bank Account Report, and you have to report.

"Every crypto trader has to file an FBAR report and file a form 8938, which is an overlapping tax money laundering form. It came from the FATCA law of 2010. These are required unless you're a small fish; if you're a small fish, there's a filing threshold and you don't have to file."

[Charlie Shrem]: What if you never held accounts overseas or even exchange accounts? 

Is this something you have to deal with? 

And what if the exchange has a U.S entity like Binance? And, they are based in Hong Kong, but they have Binance America. Isn’t Binance America required to do the reporting, not you?

[Clinton Donnelly]: None of the U.S exchanges are under full regulation of the SEC, all right. So if they were, then that reporting would be done by them, but since they’re not, you still have to report. 

[Charlie Shrem]: I feel like that would be better. Wouldn’t that be better? If you have a brokerage account, it’s your brokerage that’s required to do all the tax reporting for you. Isn’t that so much easier, or would you rather it be, as an accountant, that traders themselves are reporting it on their own?

[Clinton Donnelly]: Absolutely what you’re saying is right. And that’s where I think we’re headed for a couple of different reasons. 

There’s been international regulation, and the U.S said they’re doing it.

They’re going to force all US crypto exchanges to comply with the all banking and brokerage regulations.  

In the future, you’ll get a 1099B just like you do from a brokerage statement listing all your trades and what you bought it for fully certified; it would be straightforward for your crypto tax returns. 

We’re not there yet.

[Charlie Shrem]: I feel like that would be such a pivotal point for Bitcoin and crypto. If I could tell a friend of mine who wants my Bitcoin, yeah, you go on this exchange, and then don’t worry about it.  

You see all the IRS headlines; you see the government taking people down. 

If you can go to an exchange and know that exchange is going to be sending you that form at the end of the year, I feel like a lot of people would trade more comfortably that way. 

Not everyone wants to be their own bank; not everyone is an anti-statist or whatever. I don’t know what you call the term, but some people want that comfort. And I understand that, and I do get it, especially non-tech people.

[Clinton Donnelly]: We’re definitely headed there. There’s an exchange called Robinhood, where it’s totally insulated. You cannot do transfers in and out of Robinhood, you have to bring cash-in, and only cash-out, any coin stays in Robinhood. As a result, they know what you bought it for, they know what you sold it for, and they could generate a 1099-B

They’re very close to doing that. I think the Uphold exchange is getting close to doing that. 

But as long as we have that you can move coins from this exchange to that exchange, to the other exchange, then the exchanges don’t know the buy and sell prices, and they cannot give you that type of report. It’s a term called covered securities.

[Charlie Shrem]: It’s a good point. If they don’t have that content, then how are they supposed to issue a report?

[Clinton Donnelly]: But I think, trend-wise, what we’re going to see as we have more and more people getting into crypto, is that trading becomes more mainstream. They’re going to demand this. They’re not going to accept anything with the chaos that we have now. 

And as a result, Fidelity is going to have a crypto exchange, Merrill Lynch is going to have a crypto exchange, and it’s going to be all-inclusive.  

How can I say this? It’s all-inclusive like Robinhood is; you cannot trade between exchanges. 

That’s where we’re headed. And in that case, because then those will be SEC-regulated exchanges, it could be very attractive.  

It has to be very mainstream. There’s probably some downsides on that too, but I think from a tax point of view, it’d be very attractive.

[Charlie Shrem]: You know when you don’t understand something, you become hostile to it automatically when you’re constantly trying to understand something over time, and you can’t. That’s why there’s a lot of hostilities still towards crypto because simply people don’t understand it. 

And why I’m telling you this is, if you do a Google search and you type Bitcoin taxes or crypto taxes or IRS Bitcoin, it’s all negative. It’s negative; it’s fear, it’s uncertainty, it’s doubt, it’s scary, there’s no clarity. 

And I think that’s one of the reasons that a lot of people just simply say, “Okay, if I don’t get it and it’s too complicated, how is the IRS supposed to get it and not be too complicated?”

That’s the wrong mentality to have, right? 

Just because something is scary, if you’re in our space, if you’re in our industry, you have to pay attention to your taxes.

READ MORE: Why Your Crypto Taxes Need An Enrolled Agent Specializing in Crypto

What CPAs will handle anti-money laundering forms for crypto traders?

crypto tax

“The problem is that a lot of CPAs that I've gone to, and other people went to, they either say I don't want to touch this, or they make you more scared.”

- Charlie Shrem, Untold Stories Tweet

Do you know what a lot of CPAs are doing now? They’re saying hire our tax firm to do your tax return if it is not a normal return. There’s a word for it, where they have to go deep dive into it. 

What’s the term I’m looking for? Is it forensics? 

We have to do forensics on this now, so it’s more expensive. So now charging more money because someone’s in crypto.

Protect yourself from the IRS with a CryptoTaxAudit membership.

Watch The Full Interview Video

Subscribe below to not miss part 3 of this transcription series, coming soon. 

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Why Crypto Traders Are Low Hanging Fruit for the IRS

Crypto traders need to take the first preventative step against receiving a crypto IRS letter by understanding what they are up against.

Like many crypto traders, you may have experienced a great deal of uncertainty about the future.

And, that uncertainty may have caused you to fast-track your earned wealth with some speculative crypto trading.

You may have also thought that by not reporting all your gains, you could keep that extra money in your pocket to stay wealthier. 

Does any of that sound familiar? 

If it does, you are not alone.  

According to industry surveys, an estimated 46% of crypto traders didn’t even report their cryptos on their tax returns.  

They believe the IRS won’t find them.

And it’s unfortunate, but they are wrong.

This post and my e-book Why Crypto Traders Are the Low-Hanging Fruit for the IRS have both been written for crypto traders to help them realize that hiding is not a successful strategy.

Tell me why crypto traders are the low-hanging fruit for the IRS.

Crypto Traders can avoid IRS problems

Let’s begin by dissecting this.

The IRS views crypto traders as the easiest goal for them to target.  

Why is that?

crypto trader
[Noun]
A trader, who is exchanging one cryptocurrency for another, buying and selling coins, and exchanging fiat money into crypto.

low-hanging fruit
[Noun] 
The most easily achieved of a set of tasks, measures, goals, etc.

Because many crypto traders have hidden their income and a snowball effect began from there.  

It’s hard getting back into compliance once you have hidden income.

You risk continuing to expose those errors each time you file with the IRS.  

But I’m here to tell you. It’s not entirely your fault and that there are solutions.

Maybe you were afraid and didn’t know how to file, or perhaps you didn’t know where to turn for help?

Bookmark my e-book Why Crypto Traders Are Low-Hanging Fruit for the IRS to learn more and protect yourself.

IRS Crypto Crackdown On Crypto Traders

tax case

On July 26, 2019, the IRS began sending out educational letters to 10,000 taxpayers they suspected to be crypto traders who hadn’t reported cryptos properly. (1)

The letter recipients with whom I’ve spoken shared some interesting characteristics. 

All of them had significant gains in 2017 with crypto assets worth over $1,000,000 in late 2017/early 2018. 

They all had used one or more foreign exchanges. 

One of the traders had only started purchasing cryptos in 2017 and not earlier. 

None of them had filed a form 8824 (like-kind exchange) or form 8949 to report their crypto-to-crypto trades. 

If they filed a 8949, it was only for crypto-to-fiat trades. 

None of the traders had filed anti-money laundering forms FBAR or 8938.

If this sounds like you and you have immediate questions or concerns, please don’t worry. 

We can help. Make an appointment at Donnelly Tax Law today to schedule a 30-minute consultation.

Or you can review our affordable crypto tax tools.

Most significantly, members of our CryptoTaxAudit will receive year-round defense against the IRS if you receive one of these audit letters while our member of our program.   

This membership means that we defend you in an examination of your IRS crypto activity.  

READ MORE: Avoiding the IRS Crackdown

How do crypto traders stay in virtual currency compliance if they get a Crypto IRS letter?

The first thing is, don’t panic.

But, urgent action should be taken.

I anticipated these letters in my e-book, Why Crypto Traders are Low-Hanging Fruit for the IRS.  

Read this book to help you diagnose your situation.  

There’s time to fix your exposure and avoid penalties, but you must be decisive.  

You can also still get tax amnesty, or if you want to do it yourself, we have the Crypto Tax Fixer Package.

Otherwise, schedule a call on my calendar as soon as possible. We will not turn you away.  

I have a team of people ready to fix your situation, but we need to start soon.

Start protecting yourself with

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Video Interview & Transcription: Virtual Currency Owners Have to Confess to the IRS with Charlie Shrem

We delve into the major new tax requirement that affects virtual currency owners. Learn more from part 1 of this interview video with Charlie Shrem.

Crypto Tax Expert, Clinton Donnelly, and Crypto Influencer, Charlie Shrem discuss crypto taxes, the IRS, and why every virtual currency owner has to confess “Yes” or “No” to the IRS.  

In crypto, there are big fish, and there are small fish, find out the difference between the two.

Interview Video with Charlie Shrem (Transcribed): Part 1, Virtual Currency Owners Have to Confess to the IRS

telecommuting

Become a member of CryptoTaxAudit today to protect you from an IRS audit letter. 

In part 1 of our multi-transcription series with Charlie Shrem, Clinton and Charlie discuss why starting in 2020, every owner of virtual currency has to confess “Yes or No” under oath.

[Charlie Shrem] What’s going on starting in 2020 is that every taxpayer has to confess under oath yes or no if they’ve dealt with cryptocurrencies in the past year? 

We have a lot of useful nuggets of information. Honestly, after doing this show, I feel a lot better, and you should, too, when you listen to this show. 

A great return defends you, and a good crypto tax return is one that is not easy to prepare but a guy like Clinton Donnelly can.  When you finish this show you’ll learn how to do it on your own or you’ll be confident enough to give him a call.

He’s got a very, very good attitude about taxes, he wants to work with you, and he wants everyone to do it the right way. But at the same time realizing that you shouldn’t pay the IRS one more cent than you legally are obligated to.

If you’re buying, selling, or holding crypto, you are low-hanging fruit for the IRS. For many years I’ve been waiting for a good solution where I can be proactive in my taxes but more importantly to sleep at night.

Before the IRS picks you for an examination, subscribe to our newest sponsor CryptoTaxAudit

CryptoTaxAudit is an audit protection service designed for the needs of the crypto trader. That’s you, me, and everyone else.

If the IRS examines your crypto reporting on your tax return, the experts at CryptoTaxAudit will provide all the IRS representation and tax law research at no charge.

The statute of limitations on a crypto tax return is six years. 

CryptoTaxAudit covers you regardless of what year the IRS examines. Best of all, you can sleep well, knowing that the best crypto tax gurus are ready to defend you.

CryptoTaxAudit is a service of Donnelly Tax Law. 

While other services are reactive, CryptoTaxAudit is proactive and gives you tools like their crypto tax health check so you can reduce your chances of getting an IRS letter in the first place. 

No one likes that certified letter from the IRS. Donnelly Tax Law specializes in complex crypto tax return preparation. No situation is too complex for them. So check them out at cryptotaxaudit.com and listen, guys, start defending yourself today.

This is the most important episode you’re going to listen to on this show. 

Tax season is coming up.

And why that’s important is because:

"If you're in crypto, if you buy, sell, trade hold, do anything Bitcoin or crypto-related, this episode is extremely important."

- Charlie Shrem, Untold Stories Tweet

We’re going to talk about all the subjects and conversations you’ve been purposely ignoring.

Or that you’ve been dreading with anxiety.

Now, our guest today, Clinton Donnelly.

The New Tax Requirements for Virtual Currency

cryptos reported on anti-money laundering forms

"Clinton, thank you so much for coming on the show. You are the best crypto tax return preparer in the business. You have the cojones to do what every other CPA doesn't. The CPAs that I've talked to have turned me down."

- Charlie Shrem, Untold Stories Tweet

Thank you for coming on the show, and thank you for doing what you’re doing.

[Clinton Donnelly] I am so glad to be here, Charlie.

"I'm passionate about helping people because there's just such a lack of understanding on how to do a great crypto tax return, and it makes every crypto trader vulnerable. So I'm glad we can be talking and letting people know."

[Charlie Shrem] There’s a lot of ambiguity; there’s a lot of mystery, complication when it comes to taxes not related to crypto. So we have a lot to cover, let’s get right into it. 

The first thing on everyone’s mind that they’re thinking about right now is starting in April 2020, as of April 15th, when they have to report taxes. You have to say “Yes or No,” and it’s under oath. 

And that’s such a small question. Yet, my mother-in-law may have to say “yes” because I’ve opened up a wallet for her and given her $100 worth of Bitcoin, right? 

And now she’s going to be added to a list of all crypto holders in the country? How is that legal? How is that constitutionally legal?

[Clinton Donnelly] Well, yes, the IRS has put a question into schedule one, which is a part of Form 1040, where you list your income. 

It’s a question that’s at the top; you can’t miss it. It says, “Did you receive, sell, send, exchange or otherwise acquire any financial interest in virtual currencies during the year?” 

Virtual currencies are their word for cryptos. And this is a sweeping thing, and it’s yes or no.

[Charlie Shrem] Airline miles too.

[Clinton Donnelly] Yeah, that’s true. So there are two things you can do here. 

I think it’s a violation of our first amendment, fifth amendment, and eighth amendment rights, and I’ve written a letter. I sent it to the IRS protesting this, but hey, it’s not going to take the question off.

Once you’ve checked yes, you go on a list of the people who are crypto traders, and guess what? If you were a crypto trader in 2019, the odds are pretty high you were a trader in 2018 and 2017. So now you’ve put yourself on the list that they can go back and look at how you reported in 2017.

Did you report crypto gains? 

Did you report anti-money laundering forms in 2018 and 2017? 

This is about their compliance at the IRS now, and it is getting very sophisticated. 

It’s all data mining driven, artificial intelligence, and it’s just so easy to shake down who the big traders are and go after them. 

People think the IRS is going to go after them by calculating all these capital gains and their transactions. No, no, they take a whole different approach at coming after people, and it’s so crucial for people to protect themselves.

READ MORE: How are Cryptos Reported on Anti-Money Laundering Forms?

In crypto, there are big fish and there are small fish, so let's separate the two.

IRS assessments

[Charlie Shrem] Maybe you want to talk about that first, and then we can hear about what they do?

[Clinton Donnelly] That’s true. Everybody should consider if in the IRS’ eyes you are a small, medium, or large fish? 

A small fish would be if the most you ever had in the markets were say, no more than like $20,000 -$30,000. 

You’re small, and those people are hyper conscientious, and they want to do the right thing. But fixing your tax return is so minor, it’s going to generate such little income to the IRS, that they’re not going to go after you.

"We have a service for small fish called cryptotaxaudit.com. You can get the protection that someone's going to defend you if you ever get that letter from the IRS about how you reported cryptos."

What’s a Big Fish When It Comes to Virtual Currency?

enrolled agent crypto

But if you’re a large fish, you have much more exposure.

"The IRS wants to go after big fish because the rewards are much bigger."

"You're a big fish if you had $100,000 or more at peak at any time in the market and mainly if you are trading on foreign exchanges, which most people did."

It’s easy for the IRS to identify you and come after you. 

They sent out letters to large fish in August of this past year, basically a letter saying, did you report your cryptos? 

They called it an educational letter. I have maybe 15 clients who received these letters, and it’s amazing they all have million-dollar or more holdings.

The IRS knew who the big fish were. A lot of these people, along with one of my clients, did all their trading overseas, so the IRS knew they were big fish overseas.

"I wrote a book about this, Why Crypto Traders Are Low-Hanging Fruit For The IRS, and it gets into a lot of details. But if you're a large fish, it's vital when checking this new question that you have a bulletproof tax return."

You need to be rock solid because the IRS has a long time to come after you. 

Your statute of limitations, if you filed it correctly, is six years. But likely, 95% of people haven’t filed it correctly, and therefore, their statute of limitations is now open forever. 

Protect yourself from the IRS with a CryptoTaxAudit membership.

READ MORE: Introducing Crypto Tax Tools by CryptoTaxAudit

Watch the Video for the Full Interview

Part 2 of this transcription series is coming soon.
Subscribe to be notified. 

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Telecommuting, Coronavirus and You

We provide some helpful tips regarding telecommuting, coronavirus, and your business. If you have employees or are now working from home, learn these tips.

Usually, when companies begin moving from an office-based to a virtual model, they do it gradually, with plenty of planning and training. However, because of the COVID-19, many businesses are seeing the need to quickly empty out offices and send everyone home to keep the virus from spreading. No one knows how long the emergency will last, but you want to make sure the telecommuting system you hurried to implement keeps your business running until the coronavirus pandemic passes.

To make telecommuting work, even temporarily, you must keep in mind the needs of both your customers and your employees, all of whom have to get used to the new system on short notice. Every company will have different needs, but here are some general guidelines.

Make Sure Everyone Has The Technology

telecommuting

You may assume that today everyone has a late-model computer at home, with a high-speed connection. But not everyone does, or if they do, they have to share their resources with other family members. So be prepared to rent or purchase laptops for your staff and help them set up an internet connection.

Take Charge of Security

telecommuting

This will vary widely from business to business, and from employee to employee. In the office, you may have a highly secure intranet that encompasses your files, customer accounts, financial records and more. It will have to be extended so everyone has access from remote locations. You can simplify the task by giving employees access to only the information they need.

Your HR director needs access to employee files but probably not to sales figures, for example. Each remote computer needs its own security software to ensure no single machine becomes the weak link in the chain.

Rethink Your Meetings

telecommuting

You won’t be able to casually meet with staff the way you did in the office. Even formal meetings will be different. You’ll need to rethink the way you interact with your staff, and the way they interact with each other. Skype and other messaging software can be used for quick notes or video calls. Zoom is good for conferences. Evernote allows employees to share and collaborate on various projects — it’s easy to use and inexpensive. There are other choices as well, depending on your needs.

Some companies like visual conferences, and there are economical choices. But keep in mind that each employee’s background may be a messy living room rather than a well-ordered office.

Also, no matter how sophisticated your software, you cannot perfectly replicate the in-office experience. Each employee will have to work more independently. Of course, you can — and should — ask for progress reports and encourage regular communication.

Be Flexible and Understanding

telecommuting

Finally, be flexible and understanding. Many employees may not have a dedicated home office, so the voices of spouses — also working from home — and children may become part of any meeting, despite everyone’s best efforts. You will need to be understanding. But if everyone remains open to experimenting with ways to make telecommuting work, there’s a very good chance your company can weather this enforced situation.

Indeed, you may find that many, even most, of your employees adapt so well that this can become a permanent arrangement for them. This will not only improve employee morale and give you a recruiting edge, but reduce your real estate costs. Good luck with the transition!

© 2020

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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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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.
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