US tax filing tips Archives - Donnelly Tax Law

4 Ways Marriage Affects A Newly-Wed Crypto Trader’s Tax Situation

Learn how marriage can affect your tax situation as a newly-wed crypto trader and what you need to do first.

You’ve had a good run being a single crypto trader, but the day has come that you’ve happily entered new waters as a newly-wed crypto trader.

You’ve met the person of your dreams, and life has changed in more ways than just one.

The last thing on your mind has likely been how your new marriage affects your crypto tax situation.

Here Are 4 Ways Marriage Affects A Newly-Wed Crypto Trader’s Tax Situation And What You Need To Do:

1) Avoid delays on your tax refund resulting from your new name and address changes.

Your new name (or partner’s new name) through marriage must be reported to the social security administration to avoid delays on your tax refund. The name on your tax return must match your social security card; if these do not match up, it could cause delays in your tax return.

You can update your married name by filing Form SS-5, called Application for a Social Security Card. You can find this form on SSA.gov or by calling 1-800-772-1213.

If you have a new home address after your wedding day, you must also update your IRS records with Form 8822, called Change of Address on IRS.gov, and be sure to forward your mail through your local United States Post Office by visiting the change of address link at USPS.com.

2) Make sure you are in the correct tax bracket as a newly-wed crypto trader.

If you and your spouse both work, then you may move into a higher tax bracket. You may also be affected by additional medicare tax. You can find out more information by using the Tax Withholding Estimator at IRS.gov or reading more on publication 505.

Newly married couples must also complete a new Form W-4, called Earning Withholding Certificate for their employers at IRS.gov within 10 days of marriage.

3) Maximize your filing status with your newly-wed crypto trader status.

Filing jointly as a married couple could prove to be more beneficial than filing separately. Now is the time to figure out which way will suit you best and make the appropriate changes. The law says if a couple is married by December 31st, then they are considered a married couple for the entire year for tax purposes.

4) Stay clear of sneaky tax scams as a newly-wed crypto trader.

It’s important to note that the IRS will never email, phone calls, social media, or text messages. If you receive an alert in this capacity, you should beware it could be a scam. The best avenue for checking for updates if you are concerned about your tax account is logging directly into IRS.gov to see if you owe any money.

Need Crypto Tax Help?

For any questions or problems about your crypto tax return or schedule an appointment, go to DonnellyTaxLaw.com.

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Temporary IRS Tax Debt Relief For US Taxpayers With A Balance Due

Learn how US taxpayers have had a temporary pass on their outstanding IRS tax debt since the end of August.

Relief from your IRS tax debt is on the way, but for an unknown period.

If you owe the IRS, then you’ll want to shout this IRS tax debt relief from the rooftops.

In a time when the IRS has ramped up resources in every which way but loose to hone in on owners of virtual currency, they have temporarily loosened up on those taxpayers who need some IRS tax debt relief.

If you are a taxpayer who currently has an outstanding balance with the IRS, you can take a deep breath.

Why do US taxpayers currently have some IRS tax debt relief?

On August 21, 2020, the IRS announced that they temporarily halted the mailing of three notifications typically sent out to taxpayers with balances due to reduce the backlog of unopened mail that mounted while most IRS operations were closed due to COVID-19.

How can I expect to receive this temporary IRS tax debt relief?

The announcement read like this:

“The IRS has temporarily suspended the mailing of three notices to taxpayers who have a balance due on their taxes. The suspended notices are (1) CP501; (2) CP503; and (3) CP504. However, the IRS has informed taxpayers and tax professionals that some of them might still receive these notices during the next few weeks due to the delivery of existing mailings. The IRS is working to stop these mailings at their processing centers.”

What are these three IRS tax debt notices all about?

They are a series of letters sent to taxpayers who have debt with the IRS.

These letters are sent in sequential order with escalating threats for those who have failed to pay back what they owe to the IRS.

The first letter sent is called a CP501 Notice. The taxpayer is informed that they have a balance due (money owed to the IRS) on one of their tax accounts.

If there is no action taken, a second letter is sent called a CP503 Notice. The taxpayer is informed that the IRS has not heard from them with a reminder that they still have an unpaid balance on their tax accounts.

The third and most threatening notice is called the CP504 Notice. The taxpayer is once again told they have an amount due to their account. This time they are told if they do not pay the amount due immediately, the IRS will seize (levy) their state income tax refund and apply it to pay the amount still owed to the IRS.

Which tax debt relief letter am I happiest not to receive?

This third, most threatening letter is of particular interest. CP504 is the biggie. It is the threat of a levy in 30 days.

If you fall into this category and have been worried about having to take immediate action on your tax debt, you can breathe a temporary sigh of relief.

While there has been no timeframe set for these three letters’ temporary suspension, I think this is an effort by the Dept of Treasury to stop the escalation of debt issues, especially since this is an election year.

Nonetheless, it is excellent news for the millions of taxpayers who have 2019 debt that they can’t pay because of the lousy economy.

What can I do if I have a question about IRS tax debt?

If you have a tax question, you can schedule a call on our Donnelly Tax Law website.

If you are a crypto owner worried about getting a crypto tax audit, we have put together three exciting monthly memberships to put your mind at ease so you can sleep again.

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IRS History With Crypto – The Crypto Tax Webinar: Part One

Learn about IRS history with crypto, the current policies regarding crypto-taxation, and review the IRS crypto letters and their different implications.

Learn about IRS history with crypto in this transcribed Crypto Tax Webinar. Presented by Clinton Donnelly and sponsored by Accointing.

We will talk about where the current state of cryptocurrency reporting is for taxes and break down the IRS history with crypto.

In the full live webinar, we covered:

How to deal with COVID 19: Paying Crypto Taxes On An Installment Plan
The current on-going policies regarding crypto-taxation
What are taxable events and how to handle them
The sent IRS letters and the different implications for each of them
The next steps in order to conduct your crypto tax submission
Some opinions from a top Crypto CPA in the market and average estimate of how much you will be paying in taxes
An idea on how to estimate your taxes with a crypto tax tool

PART ONE: IRS History With Crypto

In Part One, we’re going to discuss the tax guidance the IRS has created to report cryptocurrencies and breakdown what those activities have been in the IRS history with crypto.

We will look at what type of enforcement the IRS is doing and review how they’re slowly increasing the level of implementation in how they’re going after people. We’ll also explore some IRS letters that they sent out.

About The Presenter

I’ll tell you a bit about myself. My name is Clinton Donnelly. I’m an enrolled agent, but I have an advanced law degree specializing in international financial regulation and taxation. I specialized in foreign reporting and crypto reporting for many years.

I have some of the largest clients out there, with tens of millions in crypto investments, complex reporting obligations, and anti-money laundering reporting needs.

And at this point, we’ve helped people reduce their capital gains by over $40 million using like-kind exchange calculations for pre-2018 gains.

Donnelly Tax Law has done over 850 anti-money laundering forms for crypto traders.

We’ve also done over a thousand tax amnesty filings to help people avoid penalties for failing to do previous filings with a 100% success rate. We’re very proud of that.

More importantly, my firm not only prepares tax returns, but we have also created a whole slew of do-it-yourself tools and books, and we now have video courses coming out to help the average person do their taxes and save a lot of money.

We are one of the few firms that have genuinely defended a crypto investor in a formal IRS audit of their crypto investments. Our background creates some unique insights in terms of what the IRS is doing and how they’re looking at things.

So I hope to share this with you and that you’ll find it helpful.

About Accointing

Accointing is a tax software package for helping you calculate your income and capital gains. It is tremendously easy to use. It does use APIs and CSV files from crypto exchanges and works with all of the major exchanges.

It’s an exciting tool found at Accointing.com. It has a lot of free features, and it supports over 300 wallets and exchanges. So it’s fully functioning and very affordable. I think it has a powerful reconciliation tool to help you get onboarded and get your transactions loaded, so you can start getting your tax results right away.

What’s the IRS history with crypto so far?

IRS Issued Initial Guidance In April 2014

The IRS has issued initial guidance in 2014 about cryptocurrency reporting of a tax sale. The IRS came out with what they called a notice that defined “what they referred to as virtual currency.” It’s cryptocurrency.

In this notice, the IRS stated cryptocurrencies are to be treated as property.

We’re going to dig into what their guidance means regarding property.

It’s not called currency; the IRS called it virtual currency. When, in fact, the IRS doesn’t treat it like that.

The IRS Commissioner Made A Statement In February 2018

In February 2018, the IRS commissioner, Charles Retting said that the IRS has, and will continue to have more information about you than you could ever possibly imagine, referring to crypto traders. So they’re working very hard at capturing a lot of data about traders and what their activities are.

The Next Update Was In March 2018

So the next update was in March 2018, Coinbase had been sued and lost in court. They were being sued by the IRS to turn over information about their account holders of cryptocurrencies.

In 2014, 2015, and 2016 tax years, only 900 people had reported cryptocurrencies when Coinbase had a customer base of six million. Most of them were Americans.

At that time, they lost in court and had the turnover, some accounting, account information.

That was the first access to some information the IRS formally got regarding whom the crypto traders are in the US.

This is the big IRS challenge, to identify who the crypto traders are.

IRS Guidance Released In October 2019

In October 2019. The IRS came out with some guidance about how cryptocurrencies should be reported.

These are FAQs. If you go onto the IRS website, IRS FAQ, virtual currency, you will see the guidance.

It’s a very easy to read explanation about how to treat the tax reporting. However, on some very critical issues, the guidance is a little confusing.

So, they also came out with a revenue ruling, which was widely criticized, not only in the accounting space but also in the crypto media and Congress.

The IRS went on to do a presentation at the American Institute of CPA’s, their national convention, which had several faux pas.

It became grossly evident that the IRS was not listening or understanding the cryptocurrency marketplace.

The IRS was doing a poor job of getting this advice and guidance to meet the taxpayers’ needs.

March 2020 Crypto Conference With IRS

The IRS had a conference of crypto corporations in March of this year with all walks of the crypto chasm.

It was a listening session for the IRS to hear what the significant movers and shakers had to say about crypto taxation. And that’s where we are from a guidance point of view.

There’s not as much guidance as we would like, but there’s adequate guidance for us for the average taxpayer to provide a complete tax return.

What does the IRS history with crypto letters mean?

One of the forms of guidance that the IRS sent out were some letters.

Let’s look at it in terms of how the IRS did their enforcement.

We’re going to talk about enforcement and how the IRS is going after people either not reporting or reporting incorrectly.

The IRS has what they call a compliance campaign, which is the primary way of organizing their activities to go after a specific focus.

They have a cryptocurrency or virtual currency guidance campaign.

July 2019 The IRS Issued About 10,000 Letters

In July and August of last year, 2019, the IRS issued about 10,000 letters to suspected crypto traders. The slide above is showing us that there were three different types of letters.

There are two types: Letter 6174 and Letter 6174A, which is a little longer. These were benign letters to someone saying: you might want to think about how you reported your cryptos. The letters asked, did you report all of it correctly along with some thoughts about how reporting should be done.

The third Letter 6173 was sent to people whom the IRS thought had engaged in criminal activity. So if you got Letter 6173, it’s because you’re on a list of people the IRS believes to have an illegal issue.

Several clients contacted me with Letters 6174 and 6174A, which told me a lot about the IRS.

From a public viewpoint, we all knew that the IRS had some Coinbase data from 2013, 2014, 2015, and 2016. And it turns out that some clients that I worked with who received these letters never dealt with Coinbase.

So, the IRS found out about them apart from that court case.

I talked to about two dozen clients who received these IRS letters; almost all had at least $900,000 in Bitcoin at the peak in 2017. That tells me that the IRS had done some significant data mining activity, putting together the pieces. And they have a pretty good idea who the crypto traders are in the US.

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The fear of a political backlash, particularly from Congress, is what has restricted the IRS from going after all the taxpayers full force. Because when Congress gets angry, particularly the House of Representatives, they cut the IRS funding.

There’s a real balance here between the IRS and how aggressively they’re going after taxpayers.

It is my perception that the IRS has mainly focused their efforts on criminal activities: Silk Road types of things, organized crime using cryptocurrencies to launder money in the proceeds of their efforts, this has been mostly what we hear about.

What is the current situation regarding the IRS history with crypto?

Several Crypto Traders Received Audits Beginning March 2020

In March 2020, several crypto traders started receiving audits from the IRS. These are formal IRS audits of their tax returns for 2017. The IRS uses the same questions in both examinations.

I have two copies of the letters. One is my clients, and the other one is from another preparers’ clients. The wording is all the same on both letters.

Based on these letters, we got a good idea of how the IRS looks at that question during the “gathering portion” of an audit.

IRS Looked For Consultants In May 2020

Just last month, we found out that the IRS was issuing an RFP (Request For Proposal) to crypto gain calculation services to find services that would act as consultants and do analysis during audits and trial proceeds.

So the IRS is looking to line up the type of talent they need to go after non-criminal crypto traders, these would be people who have failed to report their cryptos.

Is it tax evasion? Perhaps.

It is, however, considered neglect.

Many people in 2017 made a lot of money and didn’t report it because they didn’t know how back then. But, they’ve had enough time to correct that oversight since 2017.

I just had a client who wanted to fix it. He had never reported in 2017 and wanted to fix that. The IRS has started to hone in on the average investor, and I expect to see a much stronger crackdown continuing.

The IRS issued guidance in the form of a question added to Schedule 1 of your tax return.

Schedule 1 is where taxpayers list income from different sources, and Schedule 1 asks, did you receive sell, send an exchange, or have any financial interest in virtual currencies? This is a yes or no question. Every taxpayer is requested to answer it. But, failure to answer this question exposes taxpayers to liability.

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Now, this is fundamentally a perjury trap, because when you sign your tax return, and you may never have read the fine print, you may have never actually looked at the form. But what it says, and I quote, “under penalty of perjury, I have read my return and attached statements and schedules, and it is complete, true and correct to the best of my knowledge.”

So you are swearing that it is complete and it is correct. Meaning that with this question, you’re saying with a yes, or no, I have had cryptocurrencies or have not, and the penalty if you’ve lied is perjury.

My advice is that everybody should answer yes to Schedule 1. Many fear the IRS will come after them because they are trying to develop a database. But what we've seen is the IRS will use this question later to come after somebody.

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There’s a similar question on schedule B part three: “Did you have a foreign bank or brokerage account or other financial accounts?” And it was also a yes or no. And the IRS used this in prosecutions after they’ve identified someone they wanted to go after.

So that general fear that people have that, answering yes will prompt the IRS to come after them, is not well-founded. The IRS does not have that much workforce to go after people like that. But I ask that people should all answer yes to this question.

The way that the IRS has defined virtual currency in their notice of 2014-21, says that "any store of value is a virtual currency." And under that definition, basic frequent flyer, miles are a store of value because you can use it to buy the essential things.

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Also, if you have a credit card that racks up points that you could buy stuff off the credit card, that too is a store of value. So rather than people being afraid of answering this question in hiding, by saying, no, I think you should check, yes.

You should get your mother to check yes on her form and your aunts. You should get everybody to check yes. In that manner, you dilute the value of this question in total. It’s all about honesty in the answering of that question. That’s my feedback.

The IRS is lining things up, as they need, in order to prosecute everyone. They have argued that they’ve given everybody enough time.

In the RFP (Request For Proposal) the IRS sent out to crypto companies requesting consulting work, they specifically use the example of failure to report in 2017.

The IRS is focused on the people who made a lot of money in 2017, regardless of what happens this current year with crypto gains.

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Stay Tuned For Part Two of The Crypto Tax Webinar

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Watch The Full Crypto Tax Webinar

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TAX DEADLINE: The IRS Finalizes The July 15 Deadline

The IRS will not consider auto-extending the tax deadline beyond July 15 this tax season, but options are still available.

Many have been calling it the never-ending tax season.

The changing tax deadline, along with a variety of potential tax incentives resulting from the COVID-19 pandemic, remains at the point of conversation during this tax season.

Until now, it has been unclear whether this tax season’s deadline would change yet again to help US citizens cope with the financial setbacks brought about by the coronavirus this year.

Background On This Tax Deadline

Due to economic downturns created by the coronavirus, the IRS and US Treasury officials changed the tax deadline from April 15 to July 15 back in March.

Until last week, the further postponement of the US tax deadline has remained a topic of discussion.

On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic (Emergency Declaration). The Emergency Declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency”.

On March 18, 2020, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) issued Notice 2020-17 providing relief under section 7508A(a), which postponed the due date for certain Federal income tax payments from April 15, 2020, until July 15, 2020.

For an affected taxpayer concerning specified filing and payment obligations, the due date for filing specified forms and making specified payments was automatically postponed to July 15, 2020.

This relief was automatic; affected taxpayers did not have to call the IRS or file any extension forms, or send letters or other documents to receive this relief. Footnote 1

IRS Keeps July 15 Tax Deadline

Treasury Secretary Steven Mnuchin announced the change in the tax return deadline back in March and continued to discuss the possibility of pushing the tax deadline beyond July 15 until recently.

The IRS has now confirmed that the deadline will not automatically extend to October 15.

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The US Treasury department has drawn the line at the administration’s consideration of such a move.

The IRS won’t extend the deadline, but they will provide payment options to help taxpayers in need as stated below:

“The IRS understands that those affected by the coronavirus may not be able to pay their balances in full by July 15, but we have many payment options to help taxpayers,” IRS Commissioner Chuck Rettig said in a statement. Footnote 2

How do I file an extension for my tax deadline to October 15?

If you need extra time beyond the IRS deadline of July 15, you can file an IRS extension.

Taxpayers who may continue to need additional time to file could choose to submit the appropriate extension form by July 15, 2020, to obtain an extension to file their return. The extension date will not go beyond the original statutory or regulatory extension date of October 15, 2020.

Here is information on how to apply for an extension of time to file.

Please be aware that:

An extension of time to file your return does not grant you any extension time to pay your taxes.
You should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties.
You must file your extension request no later than the regular due date of your return.

How may we help you?

At Donnelly Tax Law, we take care of filing an extension for our clients, just to make sure we always have plenty of time.

Let us help you meet your tax needs. Talk with us today.

Or do-it-yourself with our resources for doing your taxes, from e-books to online courses.

Be sure to join our conversation on Twitter and follow us @CryptoTaxFixer.

Coronavirus Relief – CARES Act Approved for Individual and Business Help

In efforts to provide Coronavirus relief, Congress has come to an agreement on the CARES act stimulus bill. Learn the latest about what that means for you.

In efforts to provide Coronavirus relief, the Senate has passed a stimulus bill from Congress that is known as the CARES Act. The White House indicated it is acceptable to the president as well. The exact details are not clear yet, but the major provisions have been revealed.

The New York Times reports that there are five key provisions, noted below, although there still may be some uncertainty about the exact numbers.

Direct Payments to Taxpayers for Coronavirus Relief

The NYT reports $1,200 in direct payments to each taxpayer, with phaseouts for those earning between from $75,000 to $99,000, plus an additional $500 per child. The Wall Street Journal has the same numbers, without specifying the phaseouts.(Those with little or know tax liability might receive only $600.)

For the purpose of calculating the amount, the government will use 2019 returns, if they’ve been already filed. Otherwise they will use 2018 returns.The money will be directly deposited into taxpayers’ accounts, if the IRS has account information. Otherwise, it will mail paper checks. This could happen in the next few weeks.

Unemployment Benefits Increased and Radically Changed

The NYT says the bill extends jobless insurance by 13 weeks and includes a four-month enhancement of benefits. Insiders, according to the NYT and WSJ, say that gig workers such as freelancers and Uber drivers will also be covered, a major change in how unemployment insurance works.

According to the New York Times, eligible workers will get an extra $600 per week on top of their state benefit.

Coronavirus Relief Gives Small Businesses Aid With Conditions

A major sticking point in the negotiations was whether aid should go to businesses or to individuals. A novel provisions does both: The government will guarantee loans to small businesses and forgive those loans if the companies keep their employees. This gives these businesses a strong financial incentive to avoid layoffs.

Federal Reserve Loans — With Heavy Oversight

This was another controversial provision — billions of dollars in a fund controlled by the Federal Reserve. Opponents characterized this as a slush fund that benefits companies at the expense of their workers.

However, additional conditions helped ensure its passage; the government will immediately reveal any recipients, and an inspector general and a congressionally appointed board will monitor it, according to the NYT. The WSJ noted companies receiving these loans cannot do stock buybacks now or in the near future. The total amount of the loan fund is estimated to be about $500 billion.

Coronavirus Relief Health Assistance

The bill includes upward of $100 billion in aid to hospitals.

Again, none of these numbers are final, and the bill has not yet been signed, although there is wide agreement it will go through as is. We’ll have more updates as they become available, including information on the mechanism for distributing the aid checks.

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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?

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?

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?

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?

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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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

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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

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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.

Tax Time Tip 3 - Life Changes

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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

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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!

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.

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