With tax season approaching, it is important for business owners to not overlook the changes in the tax laws.
This article discusses some common tax mistakes to avoid if you are a small or family business owner.
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With the passing of the new tax law, business owners should carefully prepare for the upcoming tax season.
This article discusses steps business owners can take to ensure proper tax filings, and the importance of a financial advisor.
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Cryptocurrency is hot right now. As it emerges as an asset class of its own, many people are still confused about how to treat it for federal income tax purposes. In response, the IRS issued guidance back in 2014 that treats virtual currencies that are convertible to cash as a capital asset—but it’s not as simple as it appears. 
Taxable Events and Imputed Income
A major concern for the IRS is that coin-to-coin trades and buying items and services with coins are often mishandled for tax reporting purposes. The IRS considers these all to be taxable events, but this might not be evident to most people. Coin holders are supposed to “impute” an exchange transaction and report gains/losses in all these cases.
While it might seem absurd to have to report a taxable event each time you buy or sell something, remember that the IRS considers cryptocurrencies intangible property and not actual money, which is a crucial difference.
Coin to Cash Transactions
Capital gains and losses are the difference in the price you sell the asset at (minus transaction costs such as commissions) and your basis in the asset. Your basis is what you paid for the asset (plus transaction costs such as commissions). These types of transactions are straightforward and common sense—just think of buying and selling a stock. 
Coin to Coin Transactions
Cryptocurrency traders often exchange one type of coin for another, such as trades like Bitcoin to Ethereum. Purchases of alt coins usually require using another coin such as Ethereum—you simply cannot purchase some cryptocurrencies with U.S. dollars directly.
Some taxpayers delay capital gains recognition in situations such as these by treating coin-for-coin trades as Section 1031 exchanges; however, the new tax law has eliminated this treatment for sure, and it was questionable at best before.
Let’s look at a simplified example of a coin-to-coin trade and the tax consequences. Say you bought 1 Bitcoin for $3,000. Now it is worth $12,000 and you exchange it for 10 Ethereum. Technically, you have a taxable gain of $9,000 ($12,000 minus $3,000 basis) and your new basis in the 10 Ethereum is $12,000. 
Coins for Goods Transactions
Similar to coin-to-coin transactions, using a cryptocurrency to purchase goods or services is a taxable event. Let’s look at an example of how this works.
You were brilliant and bought some Ethereum in early 2017 for $12 per coin and now it is worth $1,100 per coin. Feeling rich, you wander over and buy yourself a new Aston Martin DB11 for 196 Ethereum coins, or the equivalent of $215,600 cash. Aside from being the proud new owner of a fine sports car, you also owe the IRS taxes on $213,248 in gains (196 coins x $1,100 value at purchase, minus your $12 cost). Hopefully you have some cash or coins left over to cover the tax bill.
Investing in Cryptocurrency Outside the United States
You do not need to report your cryptocurrency on your FBAR, according to an IRS statement issued in 2014. The IRS confirmed this position again for 2017.
Conclusion
Big gains in cryptocurrency prices over 2017 mean there is A LOT of tax money at stake, and the IRS is cracking down in an effort to get what they consider their fair share. They are using legal efforts to force major exchanges such as Coinbase to turn over customer records and institute reporting measures to stop fraud. Stay ahead of the IRS and make sure you report your cryptocurrency trading properly.
Be sure to take advantage of the many hidden write-offs you may be able to claim on your 2017 tax returns.
This article discusses the seven different deductions you may be able to claim on your 2017 returns, before the 2018 tax laws take place.
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Congress’ recent tax reform bill, the Tax Cut and Jobs Act, aims to lower taxes on corporations and companies. The GOP believes that lower taxes will help American companies to be more competitive and, in turn, will generate more jobs and more dividends for shareholders. Not all economists are sold on this argument. They note that many corporations are already cash-rich, and there are no guarantees that lessening their tax burden will result in employment gains or more generous dividends for their shareholders.
Senate Republicans agree with their Congressional colleagues on corporate tax reform, but they have additional proposals. These have been reviewed by the nonpartisan Congressional Budget Office, which has reported that the Senate’s reform package will leave lower-income and middle-class families worse off, and that proposed health insurance changes will further burden America’s poorest families. The bill overall would add some $1.4 trillion to the deficit over the next decade. Here’s an overview of the how the currently proposed reforms might affect business owners and households.
Big Business Scores Big
The top corporate tax rate would be cut from 35 percent to 20 percent (Senate version does not go into effect until 2019) – the largest one-time decrease in corporate taxes ever. Also, corporations would see additional tax breaks, including a lower rate of  percent on money expatriated from low-tax countries, and a new system that, for the most part, would tax the profits created in the United States rather than worldwide income. The amended House version taxes cash repatriation at 14 percent and non-cash assets at 7 percent, while the Senate version taxes cash at 10 percent and non-cash assets at 5 percent.
Some Joy for Small Businesses via “Pass-Through” Taxation Reform
More than 90 percent of small businesses are organized for tax purposes as “pass-through” companies – either sole proprietorships, partnerships or Limited Liability Corporations. This means that income is only taxed once. If the business receives income, the money boosts the owner’s coffers, and the owner makes the appropriate tax payments based on his/her individual tax rate. The new House proposals call for cutting the top pass-through rate from 39.6 percent to 25 percent, but excludes service companies like consultants and lawyers. It also proposes a complicated formula so that the lowered rate may apply to only about 30 percent of total income. Business owners who make $150,000 or less would be allowed to pay a reduced rate of 9 percent on the first $75,000 of their earnings. This tax break would be phased in – the lowest rate would not be available until 2022. The Senate takes a different approach to lowering business owner income by proposing allowing pass-through entity members to deduct up to 17.4 percent of their ordinary business income. It also denies this deduction to anyone operating a service business with a taxable income of more than $500,000 or $250,000, married filing jointly versus single.
A Simpler Tax Code
Filing taxes will be simpler. The House bill reduces the current seven tax brackets to just four – 12 percent, 25 percent, 35 percent and 39.6 percent. The top rate applies to income of $1 million or more per year for couples and $500,000 or more for individuals. The Senate bill keeps seven brackets but alters the rates and bracket ranges instead. The bill also eliminates many credits and deductions; but it does provide a larger standard deduction ($12,000 for single taxpayers and $24,000 for couples), a larger deduction for a child – $1,600 per child as opposed to the current $1,000 per child – and a new Family Flexibility Credit of $300 per year for individuals and $600 for couples. Both versions of the bill call for the elimination of personal exemptions as well.
Fewer Deductions for Most of Us
It may be great to have fewer tax brackets to consider, but along with this streamlining comes a big reduction in itemized deductions. What remains under the House version are deductions for charitable donations, property taxes (up to $10,000 per year), and mortgage interest deductions. The Senate version of the bill completely eliminates the SALT (State and Local Tax) deduction.
The Rich Get Richer
Changes to estate taxation will help wealthy families keep more of their inheritances, until 2024 when estate taxation is eliminated entirely. Current estimates suggest that about half the benefits included in the reform proposals will accrue to the wealthiest top 2 percent. These individuals will no longer have to pay the alternative minimum tax (AMT), a measure first introduced in 1969 to inhibit tax-dodging strategies. The extremely wealthy segment of society will also be able to file charitable deductions to lower their tax bills.
What eventually becomes law remains up for debate. However, almost everyone can agree that the final passage of the Republican’s tax reform proposals faces a rough road ahead.
IRS guidance on the tax treatment of cryptocurrencies already exists. Right now, the IRS considers cryptocurrencies to be “intangible assets.” As a result, they are subject to capital asset treatment. However, recent developments complicate matters.
On Aug. 1, Bitcoin split into two separate cryptocurrencies – Bitcoin and Bitcoin Cash. Current guidelines do not address cryptocurrency splits, also known as fork transactions.
How to Report Your Bitcoin Cash
At the split, Bitcoin Cash’s initial price was set at 9.5 percent of Bitcoin’s unit price of $2,801—or $266. Holders of Bitcoin received one Bitcoin Cash unit for every Bitcoin they held at the time of the split, making Bitcoin Cash a separate financial instrument. As a result, this makes it taxable—so recipients of Bitcoin Cash should include the transaction on their 2017 income tax returns.
Since a cryptocurrency is not technically a security or a debt-like interest, the transaction is considered neither a dividend nor interest income. So how should you report the transaction? While there is no clear-cut guidance as of yet, the best place to report the transaction is as “Other Income” on Form 1040, since this is where you can report transactions that do not neatly fit anywhere else.
Another reporting alternative is to use Form 8949, where you report the sale of capital assets. If you use this form you would report $266 per unit and offset it with a corresponding 9.5 percent of your Bitcoin cost basis. By transferring a proportional amount of your basis from the original investment you will reduce your taxable income. This reporting method also has the advantage of allowing you to offset the capital gains with capital losses and carryovers. Beware however, that this method is less likely to be accepted by the IRS.
What to Do if You Sold Your Bitcoin Cash
Selling some or all of your Bitcoin Cash means you’ll need to treat it as a capital gain and report it via Form 8949. If you sell any Bitcoin Cash, make sure you report your receipt as “Other Income” per above, since this will then serve as your basis for offsetting your sale. Your selling price would be whatever value you sold it for, less any commissions or fees on the sale. Also, remember that for your 2017 tax return filing, your holding period would start from the split date of Aug. 1, and therefore be short-term.
Why Cryptocurrency Splits Are Not Tax-Free Exchanges
Some will argue that cryptocurrency splits such as Bitcoin Cash qualify as tax-free exchanges; however, this view is unlikely to hold up to IRS scrutiny since none of the corporate reorganization non-recognition events under Section 368 apply. Bitcoin Cash is economically different from Bitcoin, and therefore should be viewed as a new category of financial instrument.
Beware the IRS
Over the past several years, many investors sold cryptocurrencies, including Bitcoin, but did not report any taxable income from the transactions, while others used Section 1031 like-kind exchange laws to postpone taxation. The IRS is none too pleased by all of this and is taking action.
The IRS estimates that hundreds of thousands of U.S. taxpayers failed to report cryptocurrency income sales over the past few years. Combined with the recent meteoric rise in prices, the IRS is hungry for the potential to collect billions in interest, penalties and back taxes.
Recently for example, the IRS summoned a large cryptocurrency exchange (Coinbase) to hand over its customer lists. Subsequently, they reached an agreement to disclose only transactions in excess of $20,000; however, it is clear from this case that the IRS is going to get aggressive on the matter.
Cryptocurrency investors need to be aware of the evolving nature of taxation in this space in order to avoid IRS problems. This is an emerging issue and one on which you can bet the IRS is not going to stand down. As always, consult a tax professional for details about your particular situation.
