Cryptocurrency: Tax Basics And Income Considerations

 

Cryptocurrency and other digital assets such as nonfungible tokens often feel like an unexplored universe, where the laws of nature haven’t yet been discovered. Where the system that is being developed, and the rules that will govern, have the potential to upend the current economic structure. As that monumental shift continues to grow, and current rules, such as existing tax law, are being applied to digital assets, certified public accountants, tax attorneys, and enrolled agents are acquiring the skills and experience necessary to assist cryptocurrency holders with their tax compliance requirements. Some advisors are even navigating the sparse but developing IRS rules and notices to provide planning advice and tax management strategies. While it is key to have knowledgeable advisors helping you manage your tax responsibility, it is also helpful for the cryptocurrency owners and investors themselves to have a basic understanding of the following ways in which their cryptocurrency transactions may generate a tax bill.

INCOME EVENTS:

The federal government currently considers cryptocurrency to be a form of property, rather than currency. As a result, certain transactions, such as making a payment using cryptocurrency or exchanging one type of cryptocurrency for another, might actually generate an income tax liability. Some potential income recognition events include the following:

Receiving cryptocurrency as payment for goods or services: A recipient is taxed on the value of the crypto that such recipient receives as payment for selling goods or performing services. The taxable amount is based on the value of the coin at the time it is received. Cryptocurrency values continue to fluctuate dramatically, so it’s possible that by the time the recipient’s tax payment is due, the coin has decreased in value to where it’s worth less than the tax that’s due on it. It is therefore important to set aside sufficient cash in US dollars to pay income tax on cryptocurrency that is received as payment for goods or services. In addition to being subject to income tax, the value of the coin received as payment may be subject to self-employment tax if the payment is connected to a trade or business.
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FinCEN Beneficial Ownership Reporting Guidance

In late September, Treasury issued its Small Entity Compliance Guide through its Financial Crimes Enforcement Network, a document that is 50 pages in length and sets forth detailed guidance about the new FinCEN “beneficial ownership” reporting requirements. And on September 27th, Treasury issued proposed regulations that delay required reporting for “reporting companies” that are formed on or after January 1, 2024, and before January 1, 2025, from 30 days after formation to 90 days after formation. A reporting company in existence prior to January 1, 2024, is not subject to the reporting requirements until the end of 2024. (Note that no reports will be accepted prior to January 1, 2024, and forms have yet to be published for purposes of reporting.)

There is a long list of “narrow” exceptions to the reporting requirement that generally relate to entities for which the government already has information as to beneficial ownership, such as a “securities reporting issuer,” an “insurance company,” a “broker or dealer in securities,” etc. So what is a reporting company? Generally, subject to the above exceptions, it is (1) a newly formed corporation, LLC or partnership created by filing a document with a  secretary of state or other similar office, or (2)(i) an existing “small business” that employs 20 or fewer persons or has reported gross receipts or sales of $5,000,000 or less on its prior year’s federal income tax return, and is (ii) a corporation, LLC or partnership created by filing a document with a secretary of state or similar office. (There also are filing requirements for certain “foreign companies.”) Essentially, the reporting requirements entail disclosure of any person who exercises “substantial control” over a reporting company or who owns or controls at least 25% of the ownership interests of a reporting company.

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You Are Invited To Annual Partnership, LLC & S Corporation Tax Planning Forum

This premier seminar, the “Annual Partnership, LLC & S Corporation Tax Planning Forum,” or simply the “Forum,” is an intensive flow-through entity tax planning seminar, which incorporates recent developments from Congress, Treasury, the IRS, case law and the many issues raised throughout the year by our attendees into the hottest flow-through planning techniques. Presented entirely new for the 37th year, the Forum provides attendees with cutting-edge strategies to take advantage of tax planning and business planning opportunities. As the Forum deals with advanced techniques, it is best suited for tax professionals who have a good working knowledge of flow-through taxation.
Read a summary of anticipated topics to be covered at the 2023 Tax Planning Forum.

This program is presented in a transactional format, so the faculty members will utilize practical examples to illustrate the issues to be discussed. An analysis of recent legislation and the latest cases, regulations and rulings will be integrated into each session. Program content and timing are based upon the current status of the law and may be modified if warranted by new developments. (Some of the program may not be covered orally.)

Structuring Techniques for 2023 and Beyond – An In-Depth Look at Closely Held Business Planning

-Analyzing any new tax legislation and its impact on flow-through planning
-Soroban and other §1402(a)(13) SE tax developments
-When is a QIO triggered and the impact of Clark Raymond
-The “no step-up” holding in Rev. Rul. 2023-2 and planning alternatives when low-basis property is held by an irrevocable grantor trust
-Structuring to maximize the benefit of SALT workaround payments
-CCA 202309015 and the controversy as to when the sale of a partnership interest may not generate capital gain
-Sorenson and where we stand with Wandry valuation clauses
-ES NPA Holding and the unsuccessful IRS challenge to nontaxability of a profits interest issued in a tiered structure: What was the IRS thinking?
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The Seventh Circuit Issued Its Long-Awaited Decision In Hoops, LP v. Commissioner

The Seventh Circuit issued its long-awaited decision in Hoops, LP v. Commissioner, Docket No. 22-2012 (7th Cir. Aug. 10, 2023), in which it held that a partnership could not deduct deferred compensation due under a non-qualified deferred compensation plan to two NBA players when the deferred compensation liability was assumed by the purchaser of the Memphis Grizzlies NBA basketball team. This result means that the seller’s amount realized on the sale includes the amount of the liability assumption, yet the seller is not entitled to a deduction for the deferred compensation at the time of the sale. At this Fall’s Forum programs, we will be discussing this important case and how to structure a sale of a business where the buyer is assuming a non-qualified deferred compensation liability to avoid this whipsaw.

Registration Is In Full Swing For Our 2023 Tax Forum programs.

Capacity is limited for our in-person programs in Las Vegas and Orlando. Register Now before registrations and rooms fill up.

For those of your who prefer the comfort of your own home/office, please join us for any of the 14 virtual Forum and Fundamentals programs… the first of which kicks-off in two months on October 17th.

We look forward to seeing you… either in person or remotely… very soon!

In the meantime, we are always happy to address your questions related to any passthrough or closely held business matter that comes up in your practice. Please do not hesitate to call us at 800-286-4760 or email either of us.

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