Cryptocurrency continues to gain popularity both as an investment asset and as a means to pay for goods and services. The growing ease with which a person can buy, hold and sell cryptocurrency has resulted in an explosion in crypto transactions – and, in turn, has left taxpayers needing to account to the IRS for their newfound cryptocurrency gains (and losses).
This powerful trend reached a new peak in 2020 when, as a result of COVID-19 disruption, related worldwide economic uncertainty and entry of companies such as PayPal into the consumer market (allowing more than 300 million users to easily buy cryptocurrencies), the crypto-market witnessed a dramatic run-up in the values of Bitcoin and many other cryptocurrencies.
The key components of Notice 2020-39 (issued 6/04/2020) are listed below:
- This notice extends the termination date of the 180-day reinvestment period. The termination of the 180-day reinvestment period would otherwise end between April 1, 2020, and December 31, 2020, will now have until December 31 to fund the Qualified Opportunity Fund (QOF). The prior COVID extension was July 15, under Notice 2020-23.
- There are significant 2019/2020 long-term tax planning opportunities and a unique situation where a taxpayer might file a return (current extended due date – October 15) before funding their QOF. Amended returns will be allowed if the taxpayer had not estimated the funding amount before filing their return.
- This extension will avoid complications associated with the early adoption of the Final Regulations for taxpayers with pre-March 15th, 2020 gains.
Due to the newness and uniqueness of the Opportunity Zone (OZ) Program and the voluminous OZ regulations, there is a fair amount of inaccurate information floating around in the business community. Following is a non-exhaustive list of some of the more common misconceptions about this powerful federal tax program. More details on the program can be found at https://www.hcvt.com/services-Federal-Qualified-Opportunity-Zone.html.
1) Only taxpayers with long-term capital gains can participate in the OZ Program.
False: Short-term capital gains and net §1231 (trade or business asset) gains, §1250 building depreciation recapture, capital gain dividend distributions, and a portion of certain “straddle” transactions can also qualify for Opportunity Zone (OZ) reinvestment. Unlike Internal Revenue Code (IRC) §1031 transactions, the OZ program can be used for real estate, tangible personal assets, bitcoin, art, collector cars, business sales, intangibles, and stocks.
TaxConnections is fortunate to have tax expert Blake Christian as a member of our platform. Given my expertise searching for tax experts for corporations worldwide, I can assure you Blake Christian is a leading tax expert on the new Opportunity Zone Program. He advises multinational corporations and he is sought out frequently by tax firms all over the country who consult with him.
Take this opportunity to receive a copy of all of his educational articles on the topic of the Federal Opportunity Zone Program. Whether you are a tax executive with a multinational corporation, a Tax Partner with a firm, or a CFO, you will learn how to utilize these extraordinary tax incentives to save your organization significant tax dollars.
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The Federal Opportunity Zone Program
- Which Gains Are Eligible?
- Qualified Opportunity Fund Requirement
- Tax Basis Adjustments/Gain Reporting Exemptions
- Legal Form Of Qualified Zone Fund
- Percentage of Qualified Property Test/Penalty
- Ineligible Business Types
- State Tax Complexities
- Real Estate “Original Use” Rehab Requirements
- Who Should And Should Not Invest In A QOF?
- Hiring Tax Credits – 8500 Tax Incentive Zones
- 5 Myths About The Opportunity Zone Program
- 5 Ways To Leverage The Opportunity Zone Program
- Opportunity Zone Participation Window
- Open Issues On Opportunity Zones
- Investment Diversification And Tax Savings
The Opportunity Zone (OZ) Program has been around for almost 18 months now but as a result of complexities and open issues on exactly how taxpayers would participate and benefit, the program is now getting national traction and investment dollars. The OZ Program is the most powerful investment and diversification and economic development tool I have seen in four decades of tax consulting.
The OZ Program borrows elements from other long-standing tax provisions –
-Internal Revenue Code Section(IRC) 1031(Like Kind Exchange) which allows taxpayers to defer taxes on properly structured real estate swaps,
-Roth 401K’s/IRAs which allow taxpayers to build-up tax-exempt income after holding the Roth Account for at least five years, and
-The Federal New Market Tax Credit Program
In summary, the OZ Program allows taxpayers to rol over all or a portion of capital gains (long or short-term) income into a Qualified Opportunity Fund (QOF). The invested funds can then be deployed into real estate or an active business located in one of the 8,700 qualifying census tracts throughout the U.S. and U.S. territories. Following these steps allows the taxpayer to defer the tax on their original capital gain until December 2026. Depending on when the taxpayer rolls their gain, they may also be eligible for a reduction in their reportable gain of 10% to 15%.