Taxing Cryptocurrency Trades

published March, 2018

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.)

ADA – Another Good Reason to be an S Corp

published September, 2013

Something the “ADA” tax law added was more Medicare Tax—in certain circumstances. Right now, if you have a W-2, you’re paying 1.45% Medicare tax on your wages, and your employer is matching 1.45%. This is a total of 2.9% if you’re both the employer and the employee of your own S Corporation. That’s not new.

There’s now even more Medicare tax if your W-2 earnings are over $200,000 Single or Head of Household, and if your W-2 earnings are over $250,000 Married Filing Joint. There will be an EXTRA 0.9% tax added.

In the past, investment income, as distinguished from W-2 wage income, had NO Medicare tax ever.

Now, starting in 2013, there IS a 3.8% Medicare tax on “investment income” if your “Modified AGI” is above threshold amounts ($250,000 MFJ, $125,000 MFS and $200,000 Single or HOH).

You’ll note all the quotation marks above; that’s because these terms are defined specifically for this rule, and the definitions don’t necessarily mean what you think they do.

Investment income, for THIS purpose, includes interest, dividends, royalties, rents, passive income from a trade or business or gain from selling personal property, including your house.

Investment income for THIS purpose does NOT include income from an S Corporation that you’re actively working in (nor tax exempt interest, nor sale of business properties).

The way the law is written, it would appear the plan is to collect more tax from people with high earnings and/or lots of passive income, i.e. “the rich.” The way my clients are written, we’d like to pay one or both of these “extra” taxes.

Final Notice: Delinquent Use Tax Return?

published August, 2013

Several of my California business clients have received notices that they were supposed to have filed Use Tax Returns with the California Board of Equalization.

Don’t panic if you got one of these notices. They are, for the most part, looking for sales tax on purchase you made from out of state. When you buy something in California for use in California, you pay sales tax in the location where the “transfer” takes place, like the store. When you buy something from out of state, you don’t pay sales tax to that “foreign” state, like Nevada, but if you are the end user of some tangible product, like a book or a toner cartridge, California wants you to report the purchase, and pay “Use” tax (which equals sales tax) on what you bought.

The CA BOE has gone completely on-line, so if you have the “express login code” and the account number, conveniently provided for you on the letters they’re sending out, you can file this on-line.

To find any purchases, I usually start with things from Amazon.

Foreign Bank Account? You May Need to Report It

published June, 2013

If you’ve got a “financial interest” or signature authority over one or more financial accounts outside the US, AND if the value of these accounts totals over $10,000 at ANY TIME during the year, you need to report them by 6/30/13.

The penalty for failing to file can be up to $10,000.

No extensions.

The Form is Form TD F 90-22.1 Report of Foreign Bank and Financial Account (FBAR). The IRS has a help phone line and email: 866-270-0733 or

Organizing for 2010

published November, 2010

The end of 2010 is just around the corner. The IRS has hired a slew of people and my anecdotal evidence suggests they’re doing more audits—I’m currently working on three. One difference between an EA (me) and an RTRP (the new group starting in 2011) is that an EA can represent clients when OTHER people have prepared the original return. So I’m something like a pinch-hitter if you need me.

Bring your reconciliation up to date, keep a box of business receipts for 2010 (and start a new box for 2011 soon). Consider advancing deductible expenses into 2010 if you can afford it—things like property tax, mortgage payments, etc. Fill out those expense reports and get them posted to your books. Gather missing info for 1099s.

I will be offering a discount on tax return preparation to “early-birds” again this year—a reduced price if you can get me most of your tax materials early. This proved to be quite a popular program last year.

QuickBooks file to the IRS?

published September, 2010

The IRS bought the program QuickBooks for some of its agents—what a boon, now they can ask for your entire QuickBooks file when they’re auditing.

Name Change for Enrolled Agents?

published July, 2010

And now that I’ve got the T-Shirt in the works, the IRS says “This would be an excellent time to change the name of Enrolled Agents.” To what, we don’t’ know. We’ll wait for the IRS to tell us, but a name suggested at the CSEA meeting in June was “Certified Tax Professionals” Since they’re adding a new “line” of preparers—possibly named Registered Tax Preparers—the IRS is using this as an opportunity to change the EA designation in title only. We’ll still be able to prepare taxes and represent taxpayers, but perhaps with a more descriptive name.

Enrolled Agents: who are they?

published October, 2007

This last month, I was asked who Enrolled Agents are, and since I’m one of them, I thought I should respond in general, since it might not be clear to everyone.

An Enrolled Agent (EA) is an individual who has demonstrated technical competence in the field of taxation both by exam (I passed in 1999) and through continuing education. I’m presenting a class on November 3rd (see below) for Enrolled Agents and other tax preparers—I get credit for putting the seminar on, and they get credit for participating.

Enrolled Agents are individuals licensed by the federal government. They can represent taxpayers before all administrative levels of the Internal Revenue Service, but we can’t represent you in tax court (that requires an additional certification, and things hardly ever get that far). 

You’ve heard the adage “a lawyer who represents himself has a fool for a client”? This typically applies to tax audits as well. An Enrolled Agent isn’t personally involved and can often provide better representation than you can yourself under the stress of an audit.

Enrolled Agents specialize in taxation. Throughout the year they advise, represent, and prepare returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. I personally refer out estates and trusts since I specialize in small business tax, and I have yet to prepare a city’s tax return, even though some of them are incorporated.

What’s the difference between Enrolled Agents and CPA’s? Only Enrolled Agents are required to demonstrate competence in matters of taxation before they may represent a taxpayer. They are the only representatives for taxpayers who receive that right from the U. S. government. Plus, we smell nice. CPA’s please see the disclaimer at the bottom of this newsletter. An analogy I like is: if you need surgery you want a surgeon—you wouldn’t want an internist. Enrolled Agents are specialists in tax, although some of us do other things as well.

My work includes advising businesses on things like entity selection, selling your business, and QuickBooks setup, plus the educational seminars and products we offer in addition to the normal tax preparation for small businesses and their owners.

Equity Section of the Balance Sheet

published October, 2007

I got a question about the “equity section” of the balance sheet and what goes there.

The section is divided up into different accounts. Exactly what name things are called depends on the particular type of company, but there are several items that are common to all companies.

The Equity section is a way to calculate the “book value” of the company as a whole. An accounting convention is A=L+OE, which means Total Assets of a company (all the cash, receivables, fixed assets and property) is equal to the Liabilities plus Owners Equity. 

In theory, if you converted all the assets of the company to cash and paid off all the liabilities, the owners get to keep what ever is ‘left over.’ That is their Equity in the company. 

It is possible to have more liabilities than assets, so the owners actually owe more money than the company has in assets. If the owners are personally liable for what the company owes, they’d have to pay to go “out of business.” That’s generally a bad thing. Companies with negative Equity can stay in business if they have good Cash Flow that allows them to service their debt long enough to become profitable. Negative Equity and bad cash flow leads to bankruptcy.

Corporations have an account called “Stock” or “Capital Stock” (same thing). This represents money the corporation has on “permanent loan” from the stockholders. This amount is set at the beginning of a corporation, and is the initial deposit made to open the checking account, plus the value of any assets contributed. This number rarely changes over the life of the corporation. Service businesses typically have smaller amounts than capital intensive businesses like computer rental companies where you’d expect a certain amount of cash to purchase equipment. I often set this account up when I prepare the first year’s tax return, if it isn’t already set up. If you’re not a corporation, you probably don’t have this account.

There is a “Net Income” account that tracks the current year income. This number should exactly match the Net Income at the bottom of the Profit and Loss statement for the year to date. This account is typical to all businesses. This is only current year income; no prior year income should be included here.

The first year, there is no “Retained Earnings” account, because this account tracks the Net Income for every year previous to the current year. (Remember the current year is all in Net Income). In the second year the Net Income moves to the Retained Earnings account: you ‘zero’ the Net Income and start Net Income over again.

Both Net Income and Retained Earnings may be either positive or negative numbers. In a typical startup, these numbers are negative the first few years until income starts to accumulate. If these numbers are negative, there should be a good reason, or you should quit.

“Distribution/Draw/Dividends Paid Out” is an account that usually carries a ‘negative’ balance. The official name depends on the form of your business, but this account is where you keep track of money taken out of the business by the owner(s). This is different from payroll, if the owners have payroll (like in a corporation). Payroll is always an expense.

There can be some other wacky accounts in the Equity section, like Treasury Stock and Paid In Capital, but you probably won’t need these in a typical set of books.

If you have questions about your Equity Section, give us a call.