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Archive for Andrew Mirisis

Can I Deduct Cryptocurrency Losses?

Can I Deduct Cryptocurrency Losses?

Claiming Cryptocurrency Losses As Tax Deductions

Introduction: Crypto Bankruptcies, Custodial Accounts, Misappropriation, Hacks, and Theft 

Can digital asset or cryptocurrency investors that were customers or account holders in a failed cryptocurrency business claim a deduction for their digital asset or cryptocurrency loss? So far this year there have been four notable crypto bankruptcies: (i) Celsius Network, (ii) Three Arrows Capital, (iii) Voyager Digital, and (iv) FTX and FTX.US. These crypto bankruptcies left their investors and customers with large economic losses.  The primary reasons for the cryptocurrency losses were because (i) the digital asset the customer held in the account abruptly and significantly dropped in value as a result of events that precipitated the bankruptcy, or (ii) the customer’s custodially held assets disappeared through misappropriation, hacking of the platform, or were simply unaccounted for. Cryptocurrency investors and customers in this unfortunate position may be able to claim a deduction for their digital asset or cryptocurrency loss as a section 165(f) capital loss, a section 165(g)(1) worthless stock loss, or a section 165(e) theft loss.

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Micro-Captive Insurance Arrangements Disclosure: An Area Of Focus For The IRS

Micro-Captive Insurance Arrangements Disclosure

CCA 202244010: What Constitutes Adequate Disclosure of Micro-Captive Insurance Arrangements

Introduction: Micro-captive Insurance Arrangements Disclosure

Micro-captive insurance arrangements are an area of focus for the IRS. As we have discussed in our prior post discussing Avrahami v. Commissioner, 149 T.C. No. 7 (2017), micro-captive insurance arrangements can be abusive if they are used improperly. As a result, the IRS requires disclosure of the material facts for a micro-captive insurance arrangement on certain information reporting forms. This disclosure gives the IRS the opportunity to analyze the underlying micro-captive insurance arrangement to determine whether it satisfies the requirements of section 831(b) and whether the arrangement constitutes “insurance” for federal tax purposes.

The 40 percent accuracy-related penalty under section 6662(i) may apply for a taxpayer’s nondisclosed noneconomic substance transactions, which includes micro-captive insurance transactions. Chief Counsel Advice 202244010 addressed whether the taxpayers adequately disclosed a micro-captive insurance arrangement where they disclosed the material facts of the transactions as reportable transactions on Forms 8886, “Reportable Transaction Disclosure Statement” but did not separately disclose the transactions on Forms 8275, “Disclosure Statement” as required by Notice 2010-62.

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Risk Of Holding Digital Assets Through Custodial Wallets

Holding Digital Assets Through Custodial Wallets

Non-Custodial Wallets v. Custodial Wallets: Considerations for Holding Digital Assets

Introduction: The FTX Collapse, Custodial Wallets, and Bankruptcy Concerns

The recent headlines regarding cryptocurrency exchange FTX’s collapse, and subsequent bankruptcy filing have put renewed focus on whether customers of a cryptocurrency exchange should hold digital assets through a custodial wallet. When a customer holds digital assets through a custodial wallet the service provider holds both the public key and the private key and effectively has control over the assets. The issue for cryptocurrency exchange customers is if a cryptocurrency exchange files for bankruptcy protection are the customers’ digital assets property of the exchange’s bankruptcy estate and available to be used to satisfy debts of other creditors? Bankruptcies involving cryptocurrency exchanges or cryptocurrency lending platforms is a developing area of the law and presents issues of first impression. Recent cryptocurrency bankruptcies include Voyager Digital LLC, Celsius Network LLC, and most recently FTX Trading Ltd. If customers of a cryptocurrency exchange or cryptocurrency lending platform hold their digital assets in a custodial wallet, rather than a non-custodial wallet (i.e., a private wallet), it may increase the risk that such assets are treated as corporate assets of the exchange or lending platform.

Risks of Holding Digital Assets in a Custodial Wallet

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Conservation Easements And Retained Mineral Interests: An Area Of IRS Focus And Litigation

Conservation Easements And Retained Mineral Interests: An Area Of IRS Focus And Litigation

Retained Surface Mining Rights in Conservation Easement Deeds: CCA 202236010

Introduction: Separating the Surface Estate from the Retained Mineral Interest

As we have discussed in prior posts, conservation easements remain an area of focus for the IRS. The Service has spent significant effort challenging and litigating conservation easements to ensure that only donations that meet the strict standards of section 170(h) of the Code are permitted. In a recent Chief Counsel Advice, CCA 202236010[1] the IRS addressed whether a conservation easement satisfies the requirements of section 170(h) where (i) the easement donor retains a qualified mineral interest, (ii) the ownership of the surface estate and the mineral interest has never been separated, and (iii) under the terms of the deed the donor can use a surface mining method to extract the subsurface materials with the donee’s approval.

As discussed below, the IRS concluded that the conservation easement did not meet the requirements of section 170(h), and in particular, the requirement that the conservation easement was contributed “exclusively for a conservation purpose” because the qualified mineral interest was never separated from the surface estate and the deed retained the possibility of surface mining to extract the subsurface materials. Donors seeking to claim a charitable contribution deduction for a conservation easement should be sure to separate the qualified mineral interest from the surface estate and that the deed to the property permits the owner of the qualified mineral interest to extract or remove the minerals by a surface-mining method.

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Conservation Easements And Retained Mineral Interests

Conservation Easements And Retained Mineral Interests

Retained Surface Mining Rights in Conservation Easement Deeds: CCA 202236010

Introduction: Separating the Surface Estate from the Retained Mineral Interest

As we have discussed in prior posts, conservation easements remain an area of focus for the IRS. The Service has spent significant effort challenging and litigating conservation easements to ensure that only donations that meet the strict standards of section 170(h) of the Code are permitted. In a recent Chief Counsel Advice, CCA 202236010[1] the IRS addressed whether a conservation easement satisfies the requirements of section 170(h) where (i) the easement donor retains a qualified mineral interest, (ii) the ownership of the surface estate and the mineral interest has never been separated, and (iii) under the terms of the deed the donor can use a surface mining method to extract the subsurface materials with the donee’s approval.

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Strategies To Repatriate Untaxed Foreign Earnings

Strategies to Repatriate Untaxed Foreign Earnings

Repatriating Untaxed Foreign Earnings Using Section 311(b) Distributions or Section 964(e) Stock Sales

Introduction: Pairing Section 311(b) Distributions or Section 964(e) Stock Sales with the Section 245A DRD

U.S. multinational corporations may be able to use section 311(b) distributions or section 964(e) stock sales with the section 245A dividends received deduction (“Section 245A DRD”) to repatriate untaxed foreign earnings, tax-free. As explained in detail in our prior post, the Tax Cuts and Jobs Act, Pub. L. 115-97 (2017) (the “TCJA”) enacted section 245A which provides that the foreign-source portion of dividends received by certain domestic corporations are eligible for a dividends received deduction provided that certain requirements are met. The TCJA transitioned the United States from a worldwide tax system to a quasi-territorial tax system.[1]

As part of that transition, the United States enacted the GILTI regime as a backstop to the subpart F anti-deferral regime. Generally, under GILTI, a U.S. shareholder of a controlled foreign corporation (“CFC”) must include in its gross income the U.S. shareholder’s GILTI for a taxable year (generally, income that is not otherwise subject to U.S. tax on a current basis). Despite the subpart F and GILTI regimes, certain foreign income is excluded from GILTI and may remain untaxed, on a current basis, in the United States. These untaxed earnings represent an opportunity for taxpayers as they may be able to execute a section 311(b) distribution or a section 964(e) stock sale that repatriates untaxed foreign earnings using the Section 245A DRD.

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Treasury And The IRS Withdraw Proposed 2006 Previously Taxed Earnings And Profits Regulations

Treasury And The IRS Withdraw Proposed 2006 Previously Taxed Earnings And Profits Regulations

Introduction: 2006 Previously Taxed Earnings and Profits Regulations Withdrawn

On October 20, 2022, the Treasury and IRS published in the Federal Register a “withdrawal of notice of proposed rulemaking” regarding the exclusion from gross income of previously taxed earnings and profits (“PTEP”) under section 959 and related basis adjustments under section 961 (the “Withdrawal Notice”).

On August 29, 2006, the Treasury Department and the IRS issued a notice of proposed rulemaking relating to the exclusion from gross income of PTEP under section 959 and related basis adjustments under section 961 (71 FR 51155), to which corrections were published in the Federal Register on December 8, 2006 (71 FR 71116 (together, the “2006 Proposed Regulations”)). On December 14, 2018, the Treasury and the IRS issued Notice 2019-001, which announced the intention to withdraw the 2006 Proposed Regulations and issue a new notice of proposed rulemaking under sections 959 and 961.

The Withdrawal Notice stated that the 2006 Proposed Regulations “were never finalized, never went into effect, and did not indicate that taxpayers could rely on them.” The Withdrawal Notice states that the government is withdrawing the 2006 Proposed Regulations to “help prevent possible abuse or misuse of them–such as inappropriate basis adjustments in certain stock acquisitions to which section 304(a)(1) applies–while the Treasury Department and the IRS continue to develop the new proposed regulations.” The Withdrawal Notice goes on to state that the IRS may, where appropriate, challenge taxpayer positions giving rise to “inappropriate results.”

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GRAs And Section 367(a)(1) Outbound Stock Transfer Rules Overview

GRAs And Section 367(a)(1) Outbound Stock Transfer Rules Overview

Introduction to Section 367(a)(1), Outbound Stock Transfers, and Gain Recognition Agreements

Section 367(a) of the Internal Revenue Code (the “Code”) governs the outbound transfer of property by a U.S. person to a foreign corporation in certain non-recognition transactions. If section 367(a) is triggered the relevant non-recognition provision is “turned off” and the U.S. person that transferred the property outbound must recognize gain on the transfer. The section 367(a) outbound transfer can be of stock or non-stock assets. If the section 367(a) outbound transfer is a stock transfer (“transferred stock”) the U.S. person may be able to avoid gain recognition if: (i) the U.S. person is a five percent or greater shareholder of the recipient corporation (the “transferee foreign corporation”) and (ii) the U.S. person enters into a five-year gain recognition agreement (“GRA”) with respect to the transferred stock.[1] A gain recognition agreement is, in effect, a contract with the IRS, wherein the taxpayer agrees to report certain events with respect to transferred stock, each year, for five full taxable years after the outbound stock transfer.  The ability of a U.S. person to enter into a gain recognition agreement is a valuable tool to avoid (or defer) gain recognition on outbound stock transfers. However, the GRA rules are nuanced and can be difficult to interpret. Additionally, the GRA rules have very specific requirements for what must be included in a gain recognition agreement. If the gain recognition agreement does not comply with the rules, it may be invalid and cause the immediate gain recognition on the outbound stock transfer under section 367(a)(1). This note will briefly discuss an overview of section 367(a), the gain recognition agreement rules, and related compliance filings.

Section 367(a) Overview

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Section 245A Overview And Requirements: Tax Efficient Repatriation Of A Foreign Subsidiary’s Earnings

Section 245A Overview And Requirements: Tax Efficient Repatriation Of A Foreign Subsidiary's Earnings

Section 245A: Tax Efficient Repatriation of a Foreign Subsidiary’s Earnings

United States-based international businesses are subject to complex reporting and compliance and anti-deferral regimes such as subpart F, global intangible low taxed income (“GILTI”), passive foreign investment company (“PFIC”), and the new corporate minimum tax that was enacted as part of the Inflation Reduction Act, Pub. L. 117-169 (2022).  These regimes are enforcement mechanisms to ensure that foreign earnings are taxed on a current basis in the United States at a minimum corporate tax rate. As part of Tax Reform, the United States introduced a new dividends received deduction (“DRD”) in section 245A for the foreign-source portion of dividends received by certain domestic corporations (the “Section 245A DRD”). The “participation exemption” in section 245A is the cornerstone of the new quasi-territorial tax system. Section 245A can be a powerful taxpayer favorable provision to exempt dividends and deemed dividends received from certain foreign corporations if the statutory requirements are met. Since Tax Reform the IRS and Treasury Department issued several regulation packages that clarify and limit the scope of these rules. This post is an update to our prior post on the Section 245A DRD, and explains some of the tax planning opportunities where a domestic corporate taxpayer may be able to benefit from the Section 245A DRD.

Overview of the Section 245A DRD

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IRS Wins Ex-Parte Petition For Another Crypto John Doe Summons

Crypto John Doe Summons

On September 21, 2022, the U.S. District Court for the Southern District of New York granted the IRS’s ex-parte motion for leave to serve a John Doe summons to M.Y. Safra Bank after the IRS’s investigation into digital asset trading platform SFOX. The court’s order requires M.Y. Safra Bank to produce records on U.S. customers of SFOX who may owe tax on unreported cryptocurrency transactions. This follows similar IRS’s John Doe summonses against Coinbase, Inc., Circle Internet Financial, and Payward Ventures, Inc. d/b/a Kraken.

John Doe summonses are a powerful tool for the government to find unreported and underreported income from digital asset transactions. After the United States District Court for the Northern District of California permitted the IRS to serve a John Doe summons on Coinbase, Inc. the IRS sent notification letters to more than 10,000 taxpayers, advising them to file amended returns and pay back taxes. The IRS said those notifications resulted in nearly $17.6 million in assessments against taxpayers. The M.Y. Safra Bank John Doe summons is the latest attack by the IRS to find taxpayers that have unreported or underreported income from cryptocurrency transactions.

M.Y. Safra Bank John Doe Summons

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Extended Tax Filing Deadline | Commonly Overlooked Tax Disclosures

Extended Tax Filing Deadline | Commonly Overlooked Tax Disclosures 

This year the extended tax filing deadline for U.S. citizens or residents, sole proprietorships, C corporations, and single-owner LLCs is Monday, October 17, 2022. Through the course of the tax year companies often engage in transactions that require tax return disclosures. These disclosures may not be top of mind until the taxpayer starts its tax return preparation. Depending on the transactions that occurred during the tax year, some disclosures may require significant analysis and consideration prior to drafting the form or disclosure. Additionally, in some cases the reporting obligations and disclosure rules are nuanced and require a careful reading of the Code, Treasury Regulations, or the IRS instructions to the form. Additionally, taxpayers simply may not be aware of a reporting obligation that resulted from a transaction.

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