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Cashing in on Cryptocurrency? The IRS wants in.

Cryptocurrency investing is both “cool’ and “hot.”. It is a type of digital asset that is traded online. There have been wide fluctuations in value, and this means it is an attractive investment for traders and other investors. But did you know that a transaction with cryptocurrency (Bitcoin for example) may result in a taxable income? Let’s say you purchased 10,000 units of Bitcoin for $20,000. If the Bitcoin appreciates and you purchase a $40,000 yacht with 5,000 units of Bitcoin you would have a taxable income of $30,000.

If you have been investing in cryptocurrency the IRS has been keeping tabs on you. In 2017, the IRS won a lawsuit requiring Coinbase (one of the largest digital currency exchanges) to hand over all information of customers that have been trading over $20,000 on this platform. So, if you have recently had a $20,000 transaction and you think the IRS doesn’t know about it, you are probably wrong.

The IRS has recently sent out 10,000 letters warning cryptocurrency holders that they may have filed their tax returns improperly or may not have done so at all.

The IRS says that virtual currencies are to be treated as property, not currency. What is the significance of treatment as property? There is a lot of significance. In general, when you exchange property for goods and or services a taxable transaction occurs. In the yacht example above, there is a $30,000 gain (on the cryptocurrency, not the yacht). This gain should be treated as either a capital gain or ordinary income depending on the transaction.

If you are a provider of services and get paid in cryptocurrency, you would recognize taxable income based upon the fair value of the cryptocurrency received on the date it is received. But what is the fair value? Cryptocurrencies can fluctuate in value up to 20% in a day.

All US income tax returns are required to be filed in U.S. dollars. In order to file their tax return, taxpayers must figure out the fair market value of their cryptocurrency transactions. The price fluctuation and thin market can make this difficult. 

The IRS is “cracking down” on those trying to get out of paying taxes on their cryptocurrencies and warn that “taxpayers could be subject to criminal prosecution.” The rules are complicated. If you deal in crypto and have questions, please do not hesitate to call us at 212-786-7476.

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Manage Your 2014 Tax Bill with Summertime Tax Planning

Midyear planning is critical to individuals, as well as businesses. There’s enough of the year behind you to establish a track record and enough time ahead to make changes that matter.

Summer: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.

laptop on the beach
1. Bump up pre-tax retirement plan contributions.
  • Elective contributions – the ones you ask your employer to withhold from your paycheck – reduce current-year taxable income.
  • Compare the amount you’re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year.
    • ​The maximum 401(k) contribution for 2014 is $17,500.
    • If you’re 50 or older this year, add an additional $5,500.
2. Open an education savings account.
  • There is not a federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college espenses in a taxable account, you could open a 529 plan instead.
  • Earnings on plan assets grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.
3. Reset basis with capital loss carryfowards.
  • Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income?
  • Planning point: Reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.
4. Hold off on retirement plan withdrawals.
  • In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible.
  • For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts
5. Plan for required minimum distributions.
  • What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70½?
    • Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount.
    • Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution.​
6. Shift Income.
  • Broaden your tax-planning focus to include family members.
    • ​For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings.
7. Gifting offers similar benefits. 
  • You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.)
    • For 2014, gifts under $14,000 qualify for the annual gift tax exclusion.
8. Track passive activity losses.
  • Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities.
  • The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.
9. Know the alimony rules.
  • If you are already paying alimony or finalizing a divorce that will result in alimony, be sure you’re following the rules so you can claim a deduction.
  • Among other requirements, payments must be made to a former spouse in cash under a divorce or separation decree, and must cease upon the recipient’s death.
10. Preserve Deductions.
  • You’ve heard it before: Recordkeeping is essential.
    • ​Examples of tax breaks that may be disallowed if you cannot provide proof include: charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses.
  • ​If you neglected to start tracking these expenses at the beginning of the year, get going now.
11. Check dependent status. 
  • Keep your college student qualified as your dependent by monitoring the “support” test.
    • The rule: Generally, your child cannot provide over one-half of his or her own support during the year.
    • Other relatives may qualify as your dependents, including parents in nursing homes.
12. Check payments. 
  • Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business.
    • Overpaying your 2014 tax reduces your available cash flow.
    • Underpaying your 2014 tax can lead to penalties and interest.
13. Review health insurance subsidies.
  • Review your eligibility for the advance premium tax credit
    • Premium tax credit – a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange.
    • If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit.

Combine business, pleasure and tax breaks on summer trips!

Summer is almost here and I have begun thinking about my summer vacation. Should we go to the beach, the mountains or the west coast?

Do you plan on mixing pleasure with business on a trip this summer? There’s no problem from a tax perspective as long as you follow a basic precept: The primary purpose of the travel must be business-related. Otherwise, you’ll forfeit valuable tax deductions.

On the other hand, if you stick to the tax itinerary, you can write off most of your travel costs – even though you’re spending part of the time on personal pursuits. The key is to record significantly more “business days” than “personal days” on the trip.

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Example: John Green, a self-employed individual, flies cross-country on Monday to make a presentation to a client. He is in business meetings Tuesday through Thursday. On Friday, the client inks the deal. John decides to spend the weekend playing golf and lounging by the pool. He flies home the following Monday.

The round-trip airfare costs John $1,500. He also incurs $1,400 in lodging ($200 a day) and $800 in meals ($100 a day) during his eight-day trip.

On these facts, John spends six days on business – the two days traveling count as business days – and only two days on pleasure. So the trip qualifies as business-related travel. He can deduct the entire airfare as well as five days’ lodging and 50% of the meals attributable to his business stay. Result: John deducts a total of $2,800 ($1,500 airfare, $1,000 lodging and $300 meals).

Note that any personal expenses, such as green fees at the golf course, are nondeductible. Also, if family members accompany you on a trip, you can’t deduct their expenses, but your travel may still qualify as business-related.

Of course, this is just a brief summary of the pertinent tax rules. To review the tax requirements for your travel plans, check with us before you hop on board.