Cryptocurrency - Wash Sale


Like most CPA's (NOT), I found myself wondering this morning, over coffee, if the sale of Cryptocurrencies are subject to the wash sale rules. There can be great implications to the wash sale rules.

What is a Wash Sale?

According to the Internal Revenue Code section 1091:
Section 1091(a) provides that in the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under § 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. 
So selling stock or securities for a loss can be deemed a wash sale and disallowed if they are repurchased shortly (within 30 days before or after the sale) before or after the sale. Note that wash sale rules apply to stocks and securities. Cryptocurrencies are considered property and not stocks, or securities, and in fact not currency either. As such it is believed they are not subject to the wash sale rules. However, note that not everyone is sure that this is true. Some note that the IRS has not specifically stated cryptocurrencies are not subject to the rule. However, they are considered property and not securities which are subject to the wash sale rules. All of this is subject to change at any time.

Note too that there can be different rules for traders and dealers of cryptocurrencies versus those who are investors. I know, many too are wondering what they are considered if they simply use cryptocurrencies to buy and sell products and services, or use cryptocurrencies like actual currency. I know it is not clear. For now cryptocurrencies are not currency even if you use them just like currency.

For purposes of this post I am concerned about those who are investors or those who just use cryptocurrencies to buy, sell, or trade.

Implications

In my previous post, I considered how people who use cryptocurrencies have an obligation to track their activity with them and report the activity on their tax return. Now it occurs to me that someone who sold or used cryptocurrencies early in 2018 for a gain could now possibly use or sell their crytocurrencies at a loss to offset those earlier gains and reduce their taxes. This assumes that they have cryptocurrencies that are now trading at loss compared to when they acquired them and this allows for a significant tax planning opportunity at the end of the year.

Since cryptocurrencies are considered property, for now, any losses can be used to offset gains and also up to $3,000 a year in net losses. Any net losses in excess of $3,000 can be carried forward to future years. So if you are "in" cryptocurrencies you should be having a discussion with your "tax guy" to take advantage of current opportunities and make sure you aren't surprised by the tax consequences of your activities with your cryptocurrencies.

For more information check out my previous post on cryptocurrencies:

Cryptocurrency and U.S. Income Taxes

Caution

Below you will see disclaimers about my posts and I mention being careful with information written with certain situations in mind. That is certainly the case with this post and others on cryptocurrency. I noticed some articles look at the rules and regulations for traders and dealers, others focus on the political aspects of the subject. I was surprised to find an article in favor of the wash rules for cryptocurrency to protect smaller investors. This article is great because it addresses what could be hidden dangers for those of you with cryptocurrencies aside from the political aspects of this issue. Here is a link to that article:

Opinion: The wash rule should be applied to Crypto - Crytocurrency Facts

So, if you have cryptocurrencies make sure you understand the tax implications of your activity in this market. I would be happy to help you out and be your "tax guy". Simply use my contact information below to send me an email to setup a time for a phone conversation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

Cryptocurrency and U.S. Income Taxes

Opinion: The wash rule should be applied to Crypto - Cryptocurrency Facts

The Wash Sale Rule and Cryptocurrency - IRS Medic

Hope for Active Crypto Traders With Massive Losses - Forbes 


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Can I deduct an expense this year and pay for it next year?



I would really like to reduce the taxable income from my business for this year but I would rather delay the payments for expenses until January. Can I deduct the expenses this year even if I don't pay them in the current year? Yes, you may be able to do just that. There are a couple of scenarios where this could be possible.

According to general accounting principles your expenses should be reflected on your books in the time period that you receive value for them. So it is a matching principle. However, there are some provisions that allow you to deduct expenditures that you will receive value from in the future.

Accrual Based Taxpayer - Accruing the Expense

If your business uses the accrual basis for tax purposes you may be able to enter a bill for an expense in the current year and pay for it next year. From my research it looks like you can do this with bills that you will pay off and receive the benefit from the expense within the next eight and a half months. This is a generalization and there is really more to it, but I mention this because it is a possibility.

Accrual Based Taxpayer - Allowance If You Actually Pay For the Expense

We considered how we deduct something this year that we won't pay for until after the year end. Another issue is actually paying for something and being able to deduct it this year even though it is for next year. In this case, if you have paid for it, there is a provision that you can deduct the expense as long the receipt of the value of the services does not extend beyond twelve months or the end of the next tax year.

Using a Credit Card - Cash or Accrual Based Taxpayers

Even if you are a cash basis taxpayer there is a way to take a deduction that you have not yet paid cash, or a digital equivalent, for yet. This can be done by using a credit card. Understand that using a credit card to pay for something is like borrowing money and using that money to pay for it. Using a credit card does not affect your cash balances just as borrowing and using that money to purchase something also does not affect your cash balance when it is all completed. However, in both cases, while you don't reduce cash balances as a result this year you will eventually and maybe incur some interest expense also. So if your business purchases something using a credit card that is a deductible expense you can take that expense even though you have not paid cash to pay off the credit card bill yet. By doing this you can take expenses without reducing your cash balances this year.

But is it of value to the business this year? In general you can only take the expense when your business receives the value for it. For items you use in your day to day business you can deduct them just the same as if you paid cash for them. The question really comes up when paying for things like insurance that are providing value for your business for next year. So since using a credit card to pay for it is no different that paying cash for it, as long as the benefit of the expenditure does not extend beyond the next twelve months or the end of the next tax year you are able to take the deduction this year.

Cautions

There are a couple of things you need to be cautious about when using the strategies mentioned above. First with the use of credit cards, as in the use of a checking account or digital account, make sure you don't commingle your business and personal expenditures. That means using separate accounts for business purchases, separate from your personal accounts. Commingling your personal and business accounts is messy and it could cause an IRS auditor to expand the scope of an audit for your business to include your personal and when they have a doubt they may deny expenses because of the commingling of funds.

The other caution is the use of credit cards can cause additional expenses if not paid in time or if not paid off entirely. You need to be really disciplined to control this issue.

The other concept to grasp is this strategy is in affect just moving your expenses up from next year to this year. That means that you get to reduce income this year but to go along with that eventually this will mean more income next year. You may delay it again another year by doing the same thing at the end of next year but eventually you will have a year where you have to reduce your cash balances for something you previously deducted and you won't get the tax benefit of that deduction because you took it in a previous year. So this strategy delays income and can be beneficial if you expect less income in a coming year. If not eventually you things even out and the delay will get caught up.

With the new TCJA tax law, you may want to consider just letting the expense go into next year. The TCJA provides for a new 20% of qualified income from qualified businesses. For more information about this provision see these other articles I have written:

Qualified Business Income Deduction

Qualified Business Income Deduction - Different Entity Types - Which One is Best For You

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.



Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

Tax Geek Tuesday: When Can a Business Deduct Prepaid Expenses - Forbes

How Do I Time Income and Expenses At The End of The Tax Year - The Balance

Tax Geek Tuesday Demystifying The Deduction Rules for Accrued Liabilities - Forbes


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Qualified Business Income Deduction - Different Entity Types - Which One is Best For You?


Should we reclassify from a partnership to an S Corporation?


This was the text I recently received from a client. You may be asking what type of entity would be best from your business from a tax perspective now that the tax law has changed.  The answer, of course, depends on your facts and circumstances, but let me give you something to think about.

The Qualified Business Income Deduction

To make this point I will limit this discussion to the Qualified Business Income (QBI) Deduction for taxpayers who qualify to take the full 20% deduction on their personal returns. For this situation I looked at the scenarios for a Partnership, an S Corporation, and a C Corporation. And I will also address the situation for a Sole Proprietor.

All other things being equal, profit and payments to owners, partners, and shareholders, the issue comes down to how the payments to owners, partners, and shareholders are treated for the QBI deduction.

Sole Proprietor

For a Sole Proprietor the QBI deduction is 20% of his Qualified Business Income in this comparison. The amount of money he takes out of the business generally does not affect the deduction or his taxes.

Partnership

For a Partnership the money taken out of the business by the partners can affect the deduction if they are considered Guaranteed Payments (GPs). This is really the heart of the tax situation for the partners on their personal tax returns. Guaranteed Payments are not included in Qualified Business Income on which a partner can receive a deduction based on his share of the QBI. Therefore, the larger your Guaranteed Payments are the lower your deduction will likely be.

Here is a CPA Journal article about Guaranteed Payments to Partners that may help you to understand the technical definition and the practical application as well as the lack of clarity about the definition for tax purposes.

The key here (for now) is the definition that GPs are amounts paid to partners for services that are without regard to income. It is advisable for a partnership to have a written agreement as to how much  the partners will receive in Guaranteed Payments and how they are determined. Be careful to word the agreement in a way that you can maximize the QBI deduction but also provide for the needs of the partners in the event of a loss for the year.

In the past it was possible that Guaranteed Payments were simply taxable to the partners and, like regular income to partners who are active in the business, it was and still is subject to Self Employment Taxes in most cases. Now that the tax law has changed, and because of the QBI deduction, the GPs do matter from a tax standpoint so it is important to understand what GPs are and how they are reported on the partnership return.

S Corporation

When it comes to the QBI deduction based on QBI from an S Corporation there are no GPs but there are required reasonable salaries to the shareholders that are active in the operations of the business. These salaries, like Guaranteed Payments, are not included in Qualified Business Income upon which the deduction is calculated.

What is a reasonable salary is not defined. However, they could be determined based on what you would reasonably pay someone else to do the same work and that could depend on the profitability of of the business as well. As you can see from the above referenced article, Guaranteed Payments are not defined with the same reasonable amount standard.

S Corporation Versus Partnership QBI Deduction Implications

Our discussion assumes equal payments to owners, partners, and shareholders. However, payments to partners can be Guaranteed Payments or Partner Distributions while payments to shareholders of S Corporations can be Salaries (W-2 income) or Shareholder Distributions. All of the active partners income and GPs are generally considered Self Employment Income and are subject to Self Employment Taxes while Shareholder Distributions generally are not subject to employment taxes. The other important point is that both Guaranteed Payments and salaries to active shareholders are not included in QBI while Partner Distributions and Shareholder Withdrawals do no affect QBI.

 What does this mean from an income tax perspective? For a sole proprietor, assuming all of his net income is QBI, then he could get a QBI deduction based on all of his net income. For a partnership in the same situation the partners QBI deduction could be less than the sole proprietor because of their Guaranteed Payments. For the shareholders of an S Corporation their QBI deduction could be less because of the salaries paid to shareholders. The deduction for shareholders of an S Corporation could also be less than the deduction for partners of a partnership if they receive more in salaries than the partners received in Guaranteed Payments. So because of the different standards for payments to Partners and Shareholders the QBI deduction available to Partners and Shareholders could be different.

C Corporation

When it comes to a C Corporation the new tax law provides for a new 21% flat tax rate for C corporations. There is no QBI deduction for dividends paid to stockholders of a C Corporation. These dividends are also taxable to the stockholders on their personal returns.

A Comparison

To figure out which structure now gives you the best tax advantage you would need to look at income taxes on income from different entity types, payroll taxes on W-2 income, Self Employment Taxes on self employment income, and Corporate Taxes and taxes on dividends received from C Corporations. It is complicated and will depend on your individual facts and circumstances.

For my client that sent me the text, I ran a comparison for these different entity types and overall taxes would be lower for a a partnership than for an S Corporation, and if he were a sole proprietor it would have been even lower.

Summary

To clarify, as things currently stand a partnership could benefit from a tax standpoint by having GPs as small as possible. It is probably advisable for the partnership to have a written agreement that details how much the partners guaranteed payments will be and how they are calculated. You should discuss this with your CPA to develop a plan to address this issue.

What should you do when the tax law is not clear?

What should you do when the tax law is not clear? Document, document, and document again your position and your argument for it. On a few occasions I have spoken with IRS agents about situations that were not clearly addressed in the tax law and each time they mentioned to make sure to document your decision and for me to keep a copy in my file.

Your Situation

The type of entity with which you do business will likely make a difference from a tax standpoint. The illustration above is simplified and the QBI deduction has many limitations and thresholds that could affect your situation. It is complicated and has gotten more complicated with the new tax law.

For my client, I developed a comparison for different entity types to determine which would provide the best result from an income tax standpoint. I would be happy to become your CPA and discuss your situation with you and develop strategies accordingly. I suggest you contact me using my email address below to setup a time for a phone conversation.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero


References:

CPA Journal: Avoiding Costly Mistakes on Guaranteed Payments to Partners

Forbes: The New 'Qualified Business Income Deduction' Varies Based on Your Business Type - Or Does It?

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

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