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Saturday, November 26, 2016

Virtual currency - recent tax matters

First - On 11/8/21, the Treasury Inspector General for Tax Administration (TIGTA) released a report (dated 9/21/16) – Rising Use of Virtual Currencies Requires IRS to Take Additional Actions to Ensure Taxpayer Compliance. Per the release:

Alternative payment methods, such as convertible virtual currencies, have grown in popularity in recent years and have emerged for some people as a potential alternative to using traditional currencies like U.S. dollars.  Virtual currencies offer potential benefits over traditional currencies, including lower transaction fees and faster transfer of funds for services provided.  However, some virtual currencies are also popular because the identity of the parties involved is generally anonymous, leading to a greater possibility of their use in illegal transactions.  Recently, many types of virtual currencies have been created for use in lieu of currency issued by a government to purchase goods and services in the real economy.  The overall objective of this review was to evaluate the IRS’s strategy for addressing income produced through virtual currencies."

In the report, TIGTA recommends the following actions for the IRS:
“1) develop a coordinated virtual currency strategy that includes outcome goals, a description of how the agency intends to achieve those goals, and an action plan with a timeline for implementation;
2) provide updated guidance to reflect the necessary documentation requirements and tax treatments needed for the various uses of virtual currencies; and

3) revise third-party information reporting documents to identify the amounts of virtual currencies used in taxable transactions.”
TIGTA also notes that in Notice 2014-21, the IRS sought comments and received many, but has not issued any additional guidance. One of these letters was from the AICPA and listed ten areas where additional guidance would improve compliance and provide clarity (6/10/16 letter).

Second - Also this month, the IRS filed a petition in District Court to obtain two years of records (2014 and 2015) from Coinbase (U.S. v. John Doe, No. 3:16-cv-06658-JSC (ND CA 11/17/16)). The 16-page petition explains how virtual currency works and what Coinbase does. The IRS believes that some of its customers have not complied with the tax laws. See Stan Higgins, “The IRS is Seeking Data on Coinbase’s Bitcoin Customers,” CoinDesk, 11/18/16.

The IRS notes the following bitcoin usage: “As of January 2016, it was reported that more than 100,000 merchants globally were accepting bitcoin payments with businesses such as, Home Depot, DirectTV, Dell, Microsoft, Amazon, and Expedia topping the list. By Fall 2016, the number of merchants is forecast to grow to 150,000. With bitcoin, a user can buy webhosting services, cars, homes, and even pizza and manicures. In 2015, there were 125,498 bitcoin transactions per day. Using the total bitcoins traded in 2015 and the 2015 bitcoin average price, I calculated the 2015 annualized transaction value in U.S. dollars to be $10,116,817,608.”

IRS concerns include no information reporting for the transactions, articles about people using bitcoin to avoid tax reporting, exchanging money for virtual currency through foreign banks, and use for crimes including money laundering.

For more on virtual currency and the blockchain, see my website.

What do you think? Any virtual currency tax issues you see?

Thursday, November 24, 2016

New I-9 Required by 1/22/17

There are a lot of tax and related forms!  Here is an update about one required by all employers when they hire an employee. Form I-9, Employment Eligibility Verification, has been updated (as of 11/14/16) and the new version must be used by January 22, 2017 (see news release from USCIS). "Among the changes in the new version, Section 1 asks for “other last names used” rather than “other names used,” and streamlines certification for certain foreign nationals."

The purpose of an I-9, per the US Citizenship and Immigration Services office (part of Homeland Security): "Form I-9 requirements were established in November 1986 when Congress passed the Immigration Reform and Control Act (IRCA). IRCA prohibits employers from hiring people, including U.S. citizens, for employment in the United States without verifying their identity and employment authorization on Form I-9."

Sunday, November 13, 2016

California's Prop 55 - Poor Tax Policy

California's tax hike, Prop 55 on the 11/8/16 ballot, passed (62-38). Its story dates back to 2012.

In 2012, a need for revenue led voters to enact two temporary tax increases (Proposition 30). The state sales tax was increased from 7.25% to 7.50% for four years (2013 through 2016). Also, new personal income tax brackets (10.3, 11.3, and 12.3 percent) were added to the existing top rate of 9.3 percent for seven years, starting at income levels greater than $250,000 (2012 through 2018). The income tax rate increase was retroactive back to January 1, 2012.

To continue to address the need for revenues, Proposition 55 on the November 2016 ballot called for an extension of the Prop 30 higher income tax rates through 2030.

Justification for the poor tax policy label include:
  • Prop 55 offers a “temporary” tax hike for high income individuals for 12 years! This is beyond any common perception of temporary.
  • The tax hike allows the voters and lawmakers to continue to kick the tax reform can down the road for many more years. California’s tax system is outdated and out-of-sync with today’s ways of living and doing business. And it doesn’t generate sufficient revenue even with high income and sales tax rates. Work of two reform commissions this century was mostly ignored. [Commission on Tax Policy in the New Economy (final report released Dec. 2003) and the Commission on the 21st Century Economy (report released Sept 2009).]
  • Even without continuation of the quarter cent sales tax hike, the sales tax rate (state and local) and the personal income tax rates are among the highest of all states. This tax system fact suggests a need to broaden the tax bases to lower the rates. Doing so should reduce volatility, simplify and improve efficiency. 
Passage of Prop 55 makes it too easy to continue to postpone the work of designing a better tax system. 

A bad day for hopes of a better tax system for California's citizens, businesses and economy!

What do you think?

Click here for my California tax reform website.

Saturday, November 5, 2016

Sharing economy tax checklist

In September, the IRS created a Sharing Economy Tax Center with links to tax information to help freelancers and those renting property. This center offers general information primarily to help individuals understand related tax matters. But it’s not enough for practitioners, as it doesn’t cover all possible tax issues (such as state and local ones) or provide links to relevant law provisions.

Hopefully some help, I've got a checklist for tax practitioners.  See AICPA Insights (10/24/16) - here.

Monday, October 31, 2016

Halloween Taxation Tricks and Treats

Halloween has become big business in the past several years. USA Today reported that per the National Retail Federation, folks in the U.S. will spend over $8 billion on Halloween or almost $83 per shopper! ["Americans to spend $82.93 per shopper on Halloween," 9/22/16]

Do states generate sales tax revenues from this consumption?

  • Costumes - Yes. However, a few states, such as Minnesota, exempt clothing. But, Minnesota taxes costume masks if sold separately from a costume. Note: I'm not making this up to scare you. Check out Minnesota Department of Revenue's Fact Sheet 105.  Pennsylvania also exempts clothing, but not costumes. So, in most states, you'll pay sales tax on your costume. In Minnesota, you don't pay sales tax on the costume unless you buy a mask separate from the costume. In Pennsylvania, you'll pay tax on a Superman costume, but buy a suit and trick or treat as a CPA and you can avoid the sales tax. You can also avoid sales tax in Pennsylvania on your costume if it is a Girl Scout or Boy Scout uniform!
  • Pumpkins - No. Most states don't tax food and even if you take it home and don't eat it, it will be treated as non-taxable food in most states. Per the Federation of Tax Administrators, only a few states impose sales tax on food and usually at a lower than normal rate.
  • Candy - It varies among states. California and other states treat this as food and it isn't taxable. However, Texas, Minnesota and a few other states remove candy from the food  category and make it taxable. So, is all of the candy you give to trick-or-treaters taxable candy? Not necessarily. In Minnesota, for example, if the item has flour in it, such as KitKat bars (my favorite), it is not candy and is instead an exempt food!  One of the bags of candy I purchased had a mix of KitKats and other candy that has no flour.  I'm guessing such bags are not sold in Minnesota and instead, the bags of non-taxable candy are separated from the taxable bags.
  • Admission charge to a haunted house or pumpkin patch - Many states will treat this as a non-taxable service, but other states, such as Texas, tax amusement services.

So, yes, states will generate sales tax because of Halloween. Could they generate more than they do today? Yes, perhaps candy should be taxed in all states. I hate to say this on Halloween, but the usual rationale given for not imposing sales tax on food is that it is a necessity of life.  But, candy really isn't so could be subject to sales tax. But, defining it is a challenge, as illustrated by Minnesota that used the typical definition of it not having flour which is not true of all candy, such as KitKats.

What do you think?