Taxing Cryptocurrency Trades
OK, you’re hip, you’re modern, you’re buying and selling cryptocurrencies.
Those aren’t traceable, so they’re not taxable, right?
The IRS has determined that cryptocurrency is “property” (IRS Notice 2014-21), and when you exchange out of one currency into something else, you may have a reportable gain or loss.
Let’s say you bought 12 bitcoin on 1/1/17 and paid US$800 per bitcoin (US$9,600). Then you got all excited and sold (good for you!) on 12/15/17, at the peak of US$17,900 (x12 = US$214,800). And, with your $200k, you bought XRP for US$0.861760, or 249,257 on the same day.
Time passes, and you decide to buy a house, so you sell your XRP 249,257 on 3/24/18 and since the value has declined, you convert it back to US$161,073 so you can pay the down payment. You’re still doing really well, you made US$9,600 into US$161k. You expect to pay tax on $151k, the difference.
But, one currency into another is NOT a “tax free exchange” so there are two reportable transactions here. First you’ve got a taxable gain on the bitcoin in 2017 of $205,200. Then, you’ve got a loss on XRP of US$53,727. Because they are in separate calendar years, they do not “net” against each other. You owe tax on the US$205k for 2017, and then you have a capital loss in 2018 of US$53k, which you can take against other income at $3,000/year (unless you have a future capital gain to offset it).
Each time you sell, you have something to report. You need to track when and what you bought, and what and when you sold for, and report this on your taxes.
How will they catch me? Coinbase, the exchange service, will be reporting your transactions to the IRS, and I expect any other reputable exchange to do the same.
Well, what if I pay my contractor with XRP instead of dollars? If you were going to have to report to the IRS if you’d paid with US$, you still have to report at the exchange rate the day you paid (think 1099s denominated in US$).
(Thanks to Peter Schiff for the example.)
Paying for “Foreign” Services when Youíre in California
The general rule makes sense: If your income has its source inside California, you have to pay income tax in California. So my rental properties in California will cause me to have to report (and pay tax) in California, even if I live in Nevada. If I work in Alameda, I have to pay tax in California.
California (and about 22 other states) have a Market Based Sourcing per R&TC Section 25136. Market based sourcing says that sales to residents of California is California Income if the benefit of the services is received within California. So, if I’m doing tax returns for someone who lives in California but I’m in Nevada, the client is in California so they receive the benefit of my services in California—I still have California income, and I have to file a California income tax return, and pay CA taxes (!).
I can run the risk of not filing and not paying, and if they don’t find me, I might get away with it. (I wouldnít do this&emdash;tax returns I prepare have all my contact information down at the bottom of each return that I sign and file, so I’m pretty easy to find.) If your company has services provided by a contractor from outside California, or from outside the United States, but you benefit from those services IN California, that is California source income to your contractor.
So…what do I care if my non-resident CA vendor might have California income and a reporting requirement to California? That’s their tax return and their taxes, not mine.
If you pay a non-resident contractor who is “foreign” to California more than $1,500, for services you “use” in California, you’re supposed to withhold 7% of their payment and send it in to CA Franchise Tax Board. Unless an exception or waiver applies, you have to do the withholding. More on waivers in the next newsletter.
Here’s the list of things CA FTB can penalize you, the payer, for:
Here is a helpful step-by-step procedure to follow—including due dates for paying the withholding youíve taken from your vendor to the FTB (and there are penalties if you donít remit timely): https://www.ftb.ca.gov/forms/misc/1018.pdf
Here’s a link to the “self-test” to see if you’re supposed to be withholding: https://www.ftb.ca.gov/individuals/wsc/self_test/selftest.asp
But…I havenít been doing this, why am I not in jail? Because they have to audit you to figure this out.
Hereís a link to a basic video about this issue https://www.youtube.com/watch?v=2MkIdn23bbE
Whee! This can get quite complex, but in the literature you get nifty terms like Throwback Sales Under the Joyce Rule, the Finnigan Rule and Double Throwback!
This does not apply to employees on W-2.
Changes to Home Mortgage Deductibility
For tax year 2018, there are some changes to what you can deduct for mortgage interest.
The important words to remember are “buy, build, or improve” that will serve as a guide for differentiating types of home debt.
If you borrow money against your home and use it for a business activity, like buying rental property or starting up your tax preparation business, you “trace” the interest expense to the activity and deduct it on the appropriate schedule, E, C, etc. (Don’t forget to do the “T” election on the tax return!) This is effectively NOT home mortgage anymore, if you can trace the use to a business activity. Trouble can come from borrowing money for a business, tracing the interest to the business and then going out of business. You don’t get to “take back” the “T” election and move it back onto the home mortgage deduction. (So don’t do that!)
If you borrow money to buy a house, the interest on the money used for the purchase will generally go on a Schedule A, itemized deductions, with some limits. Prior to 2018, the limit for this kind of money was $1,000,000 of principal. You could (theoretically) borrow more than a million dollars to buy your house, but only the interest on the first million was deductible (but see below). Starting in 2018, for a NEW loan, not an existing loan or a refinance, the limit will be $750,000. If you already had a loan with a balance of $800k, youíll still be able to deduct the mortgage interest.
Also, before 2018, there was deductibility of “equity loans” secured by the house and used for any purpose—the interest on the first $100,000 of the balance on an equity loan was also deductible. This would be money NOT used to “buy, build, or improve.” This has been removed as a deduction for 2018, no grandfathering.
Trouble came from refinancing, particularly in 2006, where equity was generally increased, and people “took money out” because they could. It was always the case that this “extra” money was limited to an additional $100k—above that, the interest was not deductible. And no, you can’t “refinance” back to what the original mortgage was. If you bought with a mortgage for $200k and paid down your “buy build, or improve” mortgage to $50k, you can’t “borrow it back” to $200k—your “buy build, or improve” was stuck at $50k, and you previously got an extra $100k for equity loan, and the interest on the remaining $50k balance was not deductible. Starting in 2018, you’ll only get to deduct the interest on the remaining balance of the $50k that was used to “buy, build, or improve.”
One more word on refinancing—if you have a qualifying “buy, build, or improve” loan and you refinance it…and they “roll the costs in” for appraisal, loan fee, etc etc—you now have a loan that is not a refinance of the remaining balance—the fees are NOT part of the original balance. Write a check for the fees outside and above the refinance.
There are more complex issues involved here, so if you have more questions, feel free to email me your specific situation and I’ll try to help you.
Phone and Fax Numbers
Our northern California occasional in Alameda:
1516 Oak Street, Suite 109
Alameda CA 94501
Phone numbers are:
Phone (510) 332-0401
Fax (925) 478-2726
“You too can be enlightened about tax” — Tax Buddha