Kansas Crypto Legislation

This month, the Kansas Legislative Division of Post Audit, a “non-partisan audit arm of the Kansas Legislature, released a very good background report on cryptocurrency and tax issues – Reviewing Issues Related to State Cryptocurrency Tax Policies. The Division’s website also has a link to a 16-mimnute audio file that is about the best I have heard on the basics of cryptocurrency tech and tax. I recommend it if you feel you are missing the basics on these topics.

Appendix B is a helpful glossary of terms such as airdrop, blockchain, hard fork and staking.

A few interesting items from the report:

  • 16% of people in the US have invested in or used cryptocurrency (per Pew Research Center).
  • When there is not third party reporting (such as a 1099), only 45% of taxpayers accurately report their income. I have heard this before. Per the IRS (page 14), for income subject to substantial information reporting and withholding, there is only about 1% underreporting. In contrast, for income subject to little or no information reporting and no withholding, compliance is only about 55% (45% non-compliance).So if you wonder why IRC §6045 on broker reporting was expanded by the Infrastructure Investment and Jobs Act (PL 117-58, 11/15/21) to include virtual currency sales by exchanges (and perhaps by others), that the underreporting of transactions without third party reporting, is the key reason.
    Read More
Why Exclude Some Low Income Individuals From New California Families Tax Refund?

California  AB 192 (Chapter 5, 6/30/22) adds a few tax provisions including the Better for Families Tax Refund. This will provide a one-time rebate to most California taxpayers other than those with 2020 Adjusted Gross Income (AGI) above $500,000 and individuals with income so low they were not required to file a 2020 return and did not do so.  That is an odd group – highest income and lowest income, to exclude from this rebate which can be as high as $1,050 and as low as $200 depending on 2020 income and whether the taxpayer had a dependent in 2020.

The purpose of the tax refund/credit is to address financial challenges caused by COVID-19, inflation and increasing costs for gas, food and other necessities. (Per Assembly Analysis of 6/26/22.)

The qualifications for the credit:  [also see FTB website (FTB calls this a Middle Class Tax Refund*)]

  • Filed 2020 return by 10/15/21
  • Meet California AGI limits (see tables below)
  • California resident for six or more months of 2020
  • Not eligible to be claimed as dependent by someone in 2020
  • Be California resident when refund is paid

Read More

Arizona HB 2204 Proposes Unusual Tax Breaks For Crypto

The Arizona House and Senate approved HB 2204 and sent it to the governor on June 29. This bill adds new reductions to Arizona gross income for the value of virtual currency and non-fungible tokens (NFTs) received from an airdrop. Apparently though any future appreciation would not be subtracted from gross income. While not clear, I assume these tax-free airdrops will have zero basis for Arizona and a gain when disposed of.

In addition, gas fees not already added to the taxpayer’s basis in virtual currency or NFT is also a subtraction from gross income. I’m not clear what this means for basis.

HB 2204 includes definitions for gas fee, NFT and virtual currency. The virtual currency one matches the IRS definition in Rev. Rul. 2019-24 on hard forks – “s a digital representation of value that functions as a medium of exchange, a unit of account, and a store of value other than a representation of the United States dollar or a foreign currency.”

Read More

How Should A Virtual Currency Exclusion Work?
A frequent proposal for taxation of virtual currency is to add an exclusion similar to IRC section 988(e) for gain “by reason of changes in exchange rates after such currency” for personal transactions. This is a simplification measure as not records need to be kept such as when one is traveling and using a foreign currency. It is likely infrequent that the conversion gain exceeds $200.
H.R. 6582 (117th Congress), Virtual Currency Tax Fairness Act of 2022, would add section 139J to not include gain up to $200 due to changes in exchange rates, from disposition of virtual currency in a personal transaction (defined per section 988(e)). [also see rationale from the sponsors]
In contrast, the Responsible Financial Innovation Act, introduced by Senators Lummis and Gillibrand in June includes a different version of section 139J. This version says no gains or losses of $200 or less are recognized from the sale or exchange of virtual currency in a personal transaction for goods and services. If the gain or loss is from an exchange of one virtual currency for another and the gain or loss is $200 or less, this exclusion does not apply. [see page 11 of the bill + see sponsor explanation of the entire bill]
So, which is the better version?

Read More

E-File Or Mail - Shouldn't The Answer Always Be e-File?

For over 20 years, both Congress and the IRS have encouraged e-filing of tax returns.  And we know from the pandemic shutdown and work from home that paper filings can easily pile up and are not an efficient way to operate in our digital age.

But why can’t e-filing be more widely available? Some schedules can’t be e-filed meaning the entire return can’t be e-filed. Not all amended returns can be e-filed.

Why not allow all forms to be e-filed?

A case this year also reminded us of a penalty waiver issue when a taxpayer relies on their preparer for e-filing even though IRS instructions list that as a way to e-file. In Oosterwijk, No. CCB-21-1151 (DC MD, 1/27/22), the preparer did not get the extension e-filed (mistakes can happen) and a large payment was involved. The taxpayer tried to get the penalty waived for reasonable cause of relying on their preparer of 24 years. But the court said reasonable cause did not apply to this non-delegable duty (per the Boyle case). When the taxpayer said they had to use their preparer to e-file, the court noted that they could have paper filed!

Read More

What's Appropriate For Phaseout Rules And Refundable Credits?

Our federal tax law has several phaseout provisions designed to prevent higher income individuals from claiming certain credits and deductions. These phaseouts are mostly all different in terms of how income (“modified AGI”) is measured and the amount of MAGI. I think the different dollar amounts serve to prevent someone from having a very high marginal rate when they move one dollar past any single dollar amount for the entry into “high income.”

I have never understood the great variation in what items are included in MAGI. Usually the §911 foreign earned income exclusion which is $112,000 for 2022, is included. That makes sense as clearly that is income but excluded for other reasons. Rarely is tax-exempt interest income included in MAGI which is puzzling (it is included in measuring taxable social security benefits under §86). Also, exclusions are rarely added back such as gifts, inheritances and employer-provided health benefits, even though such amounts might be a significant amount of income.

Read More

30th Anniversary of Quill Decision: A Significant Nexus Ruling

On May 26, 1992, the U.S. Supreme Court issued its opinion in Quill Corp. v. North Dakota (504 US 298). This was a significant nexus ruling modifying the earlier National Bellas Hess decision (386 US 753 (1967)). In Quill, the Court ruled that physical presence was not required for due process nexus but still required for commerce clause purposes.

That meant that Congress could modify the ruling since it controls the commerce clause, but not the due process clause. But that was difficult to do so states started finding ways to find physical presence. For example, we saw New York enact the so-called “Amazon” law where the state found a connection between certain affiliates in the state helping to sell a company’s products and receiving a commission.

Finally, another case got to the Court – Wayfair, and the Court concluded “that the physical presence rule of Quill is unsound and incorrect.” I think that makes sense as it did lead to odd results. For example, a company would have sales tax obligations for having an employee in a state even for a few days. But another company with more sales in the state has no sales tax obligations in the state becuase it was able to avoid physical presence in the state. In fact, Wayfair is a multi-billion dollar company that avoided physical presence in South Dakota. Yet, the company with hundreds of engineers could easily create a software program to collect sales tax from all customers and properly remit it to the appropriate states.

In Wayfair, the Court found that South Dakota’s new nexus rule where a vendor has sales tax obligations if it delivered over $100,000 of goods or services into the state during the year or had 200 or more transactions of in-state deliveries.

Quill is still cited in some cases. It has a role in nexus history which is something I’m working on writing an article about – for the 30th anniversary.

Let me know if you have any observations to share. Thanks.

Annette Nellen, San Jose State University

Example Of How Exceptions To Rules Can Create Loopholes

A10093, Middle Class Tax Relief, introduced in New York on April 29, 2022, provides tax relief by removing overtime pay and tips from AGI. Overtime is working beyond 40 hours per week and likely means hourly workers rather than salaried ones.

While the intent might be good if aiming to help people who are seeking jobs with overtime to earn extra money to make ends meet, the reach (and the drop in tax revenue to the state) will be much broader than this.

The “justification” from the bill sponsor: “With inflation on the rise. The Middle Class is struggling. This Legislation would help lighten the load on Middle class families by suspending all sales tax on non exempt food items, no income tax on any work beyond a 41 hour work week and no tax on any tippable wages.”  (there doesn’t seem to be any sales tax aspect to A10093 though)

Read More

Prop Regs Fix A Premium Tax Credit Issue 7 Years Later

The Affordable Care Act enables individuals to not only purchase insurance on an exchange but to also get a subsidy for it if they qualify. That subsidy is the Premium Tax Credit (PTC). There are eligibility criteria such as purchasing the coverage on an exchange (such as Covered California), if the person is employed the employer does not offer affordable coverage and the household income is below 400% of the federal poverty level.

When regs were issued in 2014 at the start of the PTC, section 36B(c)(2)(C)(i) that includes this clause:

“This clause shall also apply to an individual who is eligible to enroll in the plan by reason of a relationship the individual bears to the employee.”

Read More

Increasing Teacher's Deduction For Classroom Supplies Masks Problem Rather Than Fixes It

Most employees don’t have to bring their own supplies to work or pay for materials customers need. For example, workers at most places that use cash registers to total up customer purchases are not required to fund and bring their own registers to work. Most employees required to travel for work get reimbursed for that expense.

But K-12 teachers are expected to buy supplies for their workplace and their students and about 94% of public school teachers buy these supplies (U.S. Dept of Education, May 2018). I say “expected” because clearly, most teachers use their own funds to buy supplies and since 2015 there has been a permanent tax rule that allows these teachers to deduct for AGI up to $250 of that spending. An inflation adjustment increases that to $300 starting in 2022. Prior to 2015, the deduction was temporary.

S. 3992, the Educators Expense Deduction Modernization Act of 2022, proposes to increase the $300 per year amount to $1,000. Per Senator Sherrod Brown’s April 6 press release, he proposes to quadruple the deduction (using the 2021 and earlier maximum of $250 rather than the 2022 amount of $300). He notes that $250 is “far less than most teachers spend each year out of their own pocket on classroom supplies.”

Read More

Odd Tax Proposal Harms Tax Gap And Tax Transparency

H.R. 6937, Shifting Limits on Thresholds (SLOT) Act, is a bipartisan proposal to increase the information reporting threshold for slot machine winnings from $1,200 to $5,000 and adjust it for inflation. The sponsors note that the threshold has been $1,200 since 1977.

Per co-sponsor Rep. Anthony G. Brown, this proposal “is a necessary modernization of our tax code.”

Really?  This proposal would harm our tax law by reducing gambling winnings that get reported (that is, it would increase the tax gap) and make many people think that such winnings are only taxable if they exceed $5,000.

Read More

Gasoline Excise Tax Is Not Too High

The gasoline excise tax has been 18.4 cents per gallon since 1993. It is not adjusted for inflation and Congress has not changed its rate or its operation. This tax funds the Highway Trust Fund for road construction and maintenance. Costs for those projects continue to go up yet we don’t even adjust the gasoline excise tax for inflation. If we did, the tax would be 36 cents per gallon.  If the tax were adjusted for how we fuel our cars, we would have a vehicle miles traveled tax (VMT) rather than one tied to buying gasoline. Today, many cars use the road where owners buy no gasoline.

In 2020, the gasoline excise tax generated about $24 billion of revenue. That is not a lot for a roughly $3.5 trillion federal budget. It is not near enough to fund all needed road projects. Occasionally, such as with the recent Infrastructure Investment and Jobs Act (PL 117-59; 11/15/21), funds need to be transferred from the General Fund to the Highway Trust Fund. The gasoline excise tax needs a fix, not repeal, even if temporary.

Read More