IRS Bluff About Crypto Like-Kind Exchange Backfired

A recent IRS bluff about like-kind exchange for crypto not only backfired, but also showed their true stance on the treatment. And it could benefit you.

This month, an IRS faux pax caused them to reveal their true position on like-kind exchange treatment for cryptocurrencies. Like-kind exchange treatment, Section 1031, eliminated tax on crypto-to-crypto trades prior to 2018. This was a treatment most taxpayers assumed.

Recent Statements About Like-Kind Exchange

At a November 2019 annual national convention of CPAs (AICPA), two guest speakers were associate lawyers at the IRS Office of Chief Counsel. This is the office responsible for all IRS court cases and formulating formal legal opinions by the IRS. One of the lawyers was the author of a recent IRS Revenue Ruling on the treatment of cryptocurrency hard forks and airdrops.

In a Q&A session at the conference, she stated that the Chief Counsel’s office didn’t believe that crypto-to-crypto trades were eligible for like-kind exchange treatment. Never before had the IRS stated any official position on this topic. Immediately, crypto news services broadcasted her comments as the official position of the IRS causing many taxpayers to become alarmed.

like-kind exchange

The Official Stance On Like-Kind Exchange

Within a week, an official spokesperson from the IRS Office of Chief Counsel announced that her comments were not the official position of the IRS. He further explained that the IRS would consider the use of like-kind exchange on a case-by-case basis. All audit cases are handled on a case-by-case basis, therefore, like-kind exchange for cryptos is not a position the IRS is automatically going to attack unless it is reported incorrectly on a case.

She was one of the key lawyers formulating the IRS’s crypto position. She was in a position to clearly know the management position on how to treat like-kind exchange. Her bluff backfired when management had to deny her statement.

This poor bluff forced IRS management to show their hand. It exposed the real IRS position on like-kind exchange for cryptocurrencies. They are not willing to prosecute a case where like-kind exchange is properly reported.

Read More: Biggest IRS Crypto Tax Guidance and What it Means for Crypto Traders

like-kind-exchange

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The Bad News and Good News About Like-Kind Exchange

This is good and bad news. This was good news for crypto traders who assumed like-kind exchange treatment was valid. This is bad news because most of these traders assumed they didn’t have to report the trades on their return. This was a mistake. If they didn’t report these trades on Form 8824, they can’t claim like-kind exchange treatment. The IRS would be correct to deny those traders like-kind exchange treatment and subject them large penalties for failing to report income.

From the legal research we have done at Donnelly Tax Law and CryptoTaxAudit, we believe the case for like-kind exchange is quite strong. I believe the case is so strong that the IRS Chief Counsel’s office persuaded the Congress’ Joint Committee on Taxation to change the law to limit like-kind exchange to real estate. Had they not done this, crypto traders would have kept their investments always in crypto and never in fiat, so that they would never have to pay taxes on that money again.

So, this bungled bluff should be an encouragement to traders to amend their 2017 returns to claim like-kind exchange treatment if it would save them significant taxes owed. Those traders who are on the fence as to whether the IRS would contest or not should also be encouraged to claim this option.

©2019

Featured image by André François McKenzie on Unsplash

Want to amend a return?

Here at Donnelly Tax Law we specialize in amending returns specifically dealing with cryptocurrencies and applying the like-kind exchange treatment if it’s beneficial for you (applicable for 2017 and prior years). Schedule a consultation with us to learn more. 

Would you rather do it yourself? Consider our Crypto Tax Fixer Package >> 

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Paying Taxes is Not a Choice

This Las Vegas lawyer thought he could evade paying taxes. He had been influenced by the teaching of several prominent tax defiers. Learn what happened.

A Las Vegas real estate broker was recently sentenced to 78 months in prison for tax evasion and willful failure to file tax returns.

He had been influenced by the teaching of several prominent tax defiers.

Evading Rather Than Paying Taxes

According to court records, William Waller Jr. sought to evade taxes by incorporating a shell entity, opening bank accounts in its name, and directing his income into those accounts rather than accounts in his own name. He also dealt extensively in cash and reduced his equity in his home.

Waller testified at trial that he believed that he was not required to file tax returns or pay taxes, but acknowledged that he was influenced by the teachings of several prominent tax defiers.

paying taxes

The Consequences for Not Paying Taxes

In addition to his prison sentence, Waller was ordered to pay $1.45 million in restitution.

“Paying your taxes is not a choice,” said Chief Don Fort of IRS Criminal Investigation.

©2019

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Biggest IRS Crypto Tax Guidance and What it Means for Crypto Traders

The IRS’s recent release of crypto tax guidance heralds major changes for all US taxpayers. Make sure to learn what it means for you as a crypto trader.

In early October, the IRS made its biggest release of crypto tax guidance in the past five years. And it heralds a massive change in how crypto traders report their cryptocurrency income.

The New Crypto Tax Guidance

The IRS has published an early release of the 2019 version of Schedule 1 of Form 1040. The schedule now starts with the following new question,

"At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?"

A yes or no answer is required. (The IRS defines cryptocurrencies as virtual currencies.)

This question requires all taxpayers to admit if they dabbled with cryptos during 2019.

Once a taxpayer checks this box, they are added to the list of known crypto traders for whom the IRS intends extra scrutiny.

Checking Yes to Crypto Tax

crypto tax

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So let’s say you check yes in 2019. What are the implications?

First, if you sold or exchanged cryptos in 2019, you must list your capital gains from those transactions. When listing a coin sold, you have to state the purchase date. If that date happens to be in a prior year, it begs the question, “did you accurately report your cryptos in that year?”.

Smart traders would go back and amend those prior year returns before the IRS finds out.

Checking No to Crypto Tax

crypto tax

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What are the implications of a crypto trader checking no?

When you sign a tax return, you are signing a statement that says under penalty of perjury, this return is true, correct and complete. Wrongly checking no would be a felony subject to fines or imprisonment.

This new Schedule 1 will cause all U.S. crypto traders to come out of the closet or permanently hide.

Need Crypto Tax Guidance?

To best learn how we can help you, let’s find out where your crypto taxes are at. Take our free Crypto Tax Health Check (download below) and visit our store to benefit from my other ebooks. 

Do you already know that you need our crypto tax services? Check out our Full-Service Crypto Tax Package or our do-it-yourself Crypto Tax Fixer Package.

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Social Security: Note the Key Changes for 2020

The Social Security Administration has released new changes and numbers for those paying Social Security and those collecting it in 2020.

Every year, the Social Security Administration takes a fresh look at its numbers and typically makes adjustments. Here are the basics for 2020 — what has changed, and what hasn’t.

What Hasn't Changed for Social Security

First, the basic percentages have not changed:

  • Employees and employers continue to pay 7.65% each, with the self-employed paying both halves.
  • The Medicare portion remains 1.45% on all earnings, with high earners continuing to pay an additional 0.9% in Medicare taxes.
  • The Social Security portion (OASDI) remains 6.20% on earnings up to the applicable taxable maximum amount — and that’s what’s changing.

What's Changing for Social Security

social security

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Starting in 2020, the maximum taxable amount is $137,700, up from the 2019 maximum of $132,900. This actually affects relatively few workers; the Society for Human Resource Management notes in an article that only about 6% of employees earn more than the current taxable maximum.

Also changing is the retirement earnings test exempt amount. Those who have not yet reached normal retirement age but are collecting benefits will find the SSA withholding $1 in benefits for every $2 in earnings above a certain limit. That limit is $17,640 per year for 2019 and will be $18,240 for 2020. (See the SSA for additional information on how this works.)

Cost-of-Living Adjustments

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Those collecting Social Security will see a slight increase in their checks: Social Security and Supplemental Security Income beneficiaries will receive a 1.6% COLA for 2020. This is based on the increase in the consumer price index from the third quarter of 2018 through the third quarter of 2019, according to the SSA.

An SSA detailed fact sheet about the changes is available on their site.

©2019

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Latest Release of IRS Crypto Tax Information – Interview with Brad Kimes on XRP

We’ve just had the biggest release of IRS crypto tax information in the past five years. Here’s what to know and how to be prepared as a crypto trader.

This week has been the biggest release of IRS crypto tax information in the past five years. What is going on and what does this mean for you as a crypto trader?

I discuss this big news, and answer important questions it brings up, in my latest interview with Brad Kimes of XRP. If you haven’t already, watch the interview now. 

What Comes Next?

Over the next month, I’ll be writing more in-depth about this latest IRS crypto tax information and what you can do to be prepared as a crypto trader. 

In the meantime, subscribe to my newsletter to be notified of that and other important information regarding US crypto taxes. 

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Beyond IRS Crypto Tax Information

Dealing with crypto taxes requires more than a regular tax accountant. It requires legal expertise about the US tax regulations. That’s why I have a law degree specializing in the international laws of financial regulation including taxation. I’m also an Enrolled Agent

With this background, I’ve written several books that can help you with your crypto taxes.

Strategic Tax Planning and Itemizing

Why use good tax planning? The changes made by the Tax Cuts and Jobs Act of 2017 continue to make itemizing deductions out of reach for most taxpayers.

The Tax Cuts and Jobs Act of 2017 (TCJA) made major changes that affect how individual taxpayers can claim deductions. For individual taxpayers, the biggest changes were (1) the increase in the standard deduction, which significantly raised the threshold for claiming itemized deductions; (2) the elimination of some itemized deductions (e.g., moving expenses) and the higher cap on others (e.g., the jump to 10 percent threshold for medical expenses to be deductible); (3) the $10,000 cap for state and local taxes; and (4) the much higher estate tax exemption.

Changes to Tax Planning

The result is that only about 10 percent of American households can itemize their deductions. This may change in 2025 when some of the changes made by the TCJA are scheduled to sunset, if they aren’t made permanent before then.

Despite these changes, good tax planning may make it possible to itemize deductions in some areas. There is a caveat: it may be possible to itemize only in alternate years or if there is an exceptional life event.

The following four deductions may make it possible for taxpayers to exceed the standard deduction and itemize:

Medical Expenses

Medical expenses are deductible to the extent they exceed 10 percent of adjusted gross income (AGI). For most people, health insurance covers most of the expense and their out-of-pocket expenses won’t meet the threshold. Some exceptions, however, may make it possible to exceed it:

  • Long-term care is expensive, and it usually isn’t covered by insurance.
  • Dental and orthodontic costs are allowed. Many people either don’t have dental insurance or the insurance doesn’t cover the entire expense.
  • Major health events with noncovered expenses. Noncovered drugs and other unforeseen expenses can be deducted.

Depending on your particular situation, expenses like these may put you over the threshold, either annually or in intermittent years. Keep in mind that even with this, you must still exceed the standard deduction ($12,200 for individuals and $24,400 for married individuals filing jointly in 2019) to be able to itemize.

tax planning

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State and Local Taxes (SALT)

The $10,000 cap on the SALT deduction applies to both individual and joint filers. Consequently, all taxpayers who reach that cap are $10,000 closer to the standard deduction — which means that for 2019 single taxpayers are nearly to their $12,200 standard deduction and joint filers are almost halfway to their $24,400 standard deduction threshold. These taxpayers should pay close attention to their other deductions. When they are all “bundled” together, the threshold may be met.

Charitable Giving

Depending on income and level of giving, it may be possible to take this deduction annually. Donors who don’t give enough to meet the standard deduction threshold still have options: they can make their donations every second or third year (depending on their budget), or they can contribute to donor-advised trusts, which allow donors to take a deduction in the year of the gift and designate charities as recipients later. These trusts generally have fees.

Other Deductions

It may be possible to itemize other deductions as well, including miscellaneous deductions not subject to the 2 percent AGI floor (e.g., gambling losses), interest paid for investment purposes and Ponzi scheme losses.

Most taxpayers don’t have enough in itemized deductions to claim them annually. With good tax planning, however, it may be possible to claim them in intermittent years. Schedule a consultation today for other tax-planning strategies.

©2019

Featured image by Kelly Sikkema on Unsplash

It’s Never Too Early for Tax Planning

Good tax planning is a year-round activity that requires knowing your options and keeping good records. Easily stay on top of it with these great tips.

Benjamin Franklin once said “to fail to plan is to plan to fail.” This adage certainly applies to tax planning.

Although the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated many deductions outright, there are exceptions. Certain deductions still exist but are being phased out, whereas others will expire after a set time. This means good tax planning remains an important aspect of good financial health.

Following are six steps you can take right now to prepare for your future taxes:

1. Adjust Withholdings

Determine whether you are someone who takes out more taxes every pay period so that you get a tax return, or whether you want the benefit of having the cash on hand right now. Adjust your withholding accordingly by filing a new Form W-4.

2. Organize Receipts

Start organizing your receipts now so you don’t accidently miss a deductible expense or a tax credit. Check the standard deduction for your situation, and consider whether you might need to itemize.

Having your receipts ready eases the tax preparation process. You should have the following categories of receipts and other documents handy:

  • Last year’s federal, state and local tax returns
  • Receipts/statements/cancelled checks for medical and drug costs, health savings account contributions, charitable contributions, contributions to retirement plans
  • Business travel and meal expenses (including a mileage log)
  • Childcare expenses
  • Receipts related to your home, including mortgage and line-of-credit expenses, repair and renovation expenses, real estate and school taxes (not all of these will be deductible, but they may help reduce your basis when you sell your home)
  • Any receipts related to a home purchase or sale
  • Receipts related to life events like marriages, divorces, births and deaths
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3. Review Your Investment Strategy

Short-term investments (those held 12 months or less) don’t get special treatment, but long-term investments (those held longer than one year) are typically taxed less.

4. Review Your Charitable Contribution Strategy

If you make large contributions, it may make sense to alternate the years in which you make the contribution so you can exceed the threshold for the standard deduction.

5. Evaluate Tax Credits

Consider whether you’re eligible for any tax credits so you can take full advantage of them. Tax credits are important because they are dollar-for-dollar reductions in the amount of taxes you owe. These credits may be refundable or nonrefundable. Refundable tax credits can reduce your tax liability below zero, while a nonrefundable credit cannot.

6. Review Your Estate Plan

No one knows what is going to happen in the future. TCJA changed many deductions related to gifts and estates; take this time to review the changes and make sure your estate plan reflects your wishes and is current. Keep in mind that some of the provisions now in effect are due to sunset in 2025.

If you need help preparing for your future taxes, schedule a consultation with us today.

©2019

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