Cryptocurrency Personal Property Exchanges Pre-TCJA

We’ve been discussing virtual currency, cryptocurrencies, and digital currency quite a bit lately here. That’s by design. They’ve all been in the media a …

We’ve been discussing virtual currency, cryptocurrencies, and digital currency quite a bit lately here. That’s by design. They’ve all been in the media a lot lately. That’s largely due to the increased tax collection efforts by the IRS. Many bitcoin holders started out with the impression that they were “outside the system”. Despite those impressions, though, the IRS has made it abundantly clear that this isn’t the case.

Now, the IRS is looking at cryptocurrency investors and their cryptocurrency transactions with focused attention. The IRS is just like any other person or entity. That is, it doesn’t want to waste its time and energy. And this means that it wisely directs its attention to those who have the most resources. Many bitcoin holders have massive tax liabilities to the IRS. The media is focusing on them. The IRS doesn’t want to lose its slice of the pie. Accordingly, we’re now we’re seeing it exert increased efforts to use the tax law to move in that direction.

Personal Property Classification

The IRS’ classification of cryptocurrency as “personal property” for a tax year has some interesting implications. One implication is that cryptocurrencies may have been eligible in “personal property” 1031 exchanges prior to the Tax Cuts & Jobs Act (TCJA). This issue is moot now, though, because the TCJA eliminated all personal property exchanges. But we may also see reviews of exchanges which occurred before the TCJA was implemented. In this post, we will go over the basics of personal property exchanges and then discuss some of the issues which may come up when pre-tax reform crypto exchanges are examined by the IRS in an audit. We’ll look at issues like potential short term capital gains taxes.

Personal Property Exchanges Pre-TCJA

Prior to the TCJA, taxpayers were able to exchange personal property held for business or investment purposes under Section 1031 in like kind exchanges. Many intermediaries specialized in personal property exchanges, and those intermediaries went out of business the moment that the TCJA took effect. Common exchange items, pre-TCJA, were for assets like business jets, cars owned by rental agencies, precious metals and antique cars. The rules for exchanging personal property were a bit different than the rules for real estate. The like-kind requirement, for instance, was interpreted more narrowly, as personal property had to be matched, according to “asset class.” This meant that a business jet couldn’t be exchanged for gold, for instance.

Before the TCJA, many crypto holders asked the question: does Section 1031 apply to bitcoin and other cryptocurrency? Is Form 8824 a required attachment to a Form 1040 personal income tax return? ? In light of the IRS position in Notice 2014-21, the logical response appears to be “yes.” If bitcoin and other cryptocurrency is taxable, then they should also be eligible for tax deferral. But, in light of the novelty of cryptocurrency, it’s likely that crypto exchange gains or losses occurring pre-TCJA will be reviewed by the IRS.

Review of Pre-TCJA Crypto Exchanges

If the IRS does review crypto exchanges occurring in the pre-TCJA era, what will be the outcome? These exchanges would seem to touch on key legal requirements, such as the like-kind requirement. If a person exchanges bitcoin for another cryptocurrency, such as Ethereum, does that satisfy the like-kind requirement? The answer seems to be yes, as they are both “cryptocurrency” and have similar features. But, what if there is a bitcoin exchange for another currency altogether, such as Japanese Yen or Mexican Pesos? If cryptocurrency is classed as property, then a logical argument can be made that it should also be in the same asset class as other currency. This could even mean that cryptocurrency exchanged for U.S. dollars could qualify for tax deferral. We won’t know the answer until we know the asset class which cryptocurrency falls into. That, in turn, will require an IRS ruling.

As we know, exchanges are documented at the time of their occurrence, in order to be valid. Accordingly, crypto holders cannot retroactively go back and try to claim that a particular transaction was an “exchange” after the fact. If someone sells their rental property and then later tries to use that property in an exchange, they will fail. That’s because that property became ineligible the moment it was sold without a contract with an intermediary. But clearly we can see that many issues come up when we discuss cryptocurrency in the context of Section 1031. If personal property exchanges return, and there’s a chance that they might, we’ll undoubtedly see cryptocurrency figure prominently in the debate.

Contact MC&C to Learn More Today

So there you have it. We may see a few crypto exchanges scrutinized by the IRS to see if those exchanges qualified under the old rules. If this does happen, the outcome will be interesting. There’s a chance that personal property exchanges may again be recognized in the future; so crypto exchanges may return. Who knows, we may even see this issue lobbied for by cryptocurrency enthusiasts during the next tax law change.

At Mackay, Caswell & Callahan, P.C., we try hard to stay on the cutting-edge of tax law. We do this by keeping up with current issues and reviewing current cases. We’ll continue to keep a focus on the evolving cryptocurrency tax treatment. That’s because we know that this is a key topic, both in the media, and the tax world, today. In addition to helping clients who have crypto tax debt, we handle cases involving New York income tax debt, sales tax debt, OICs, installments, and other tax matters. If you have a tax case and need assistance, don’t hesitate to reach out to us. Contact us and one of our top New York City tax attorneys will review your issue right away.

Related Posts:

  • No Related Posts

IRS enforcement efforts target taxes on cryptocurrency transactions

Bitcoin and other cryptocurrencies, referred to as convertible virtual currencies or CVCs, have been held and traded for a number of years by U.S. …

Bitcoin and other cryptocurrencies, referred to as convertible virtual currencies or CVCs, have been held and traded for a number of years by U.S. taxpayers. In 2014, the Internal Revenue Service issued a notice that it considered CVCs to be property and not fiat currency.

As a result, any sale or exchange of CVCs or the use of CVCs to purchase property or to pay for services would be a taxable transaction, with the taxpayer having either a gain or loss depending on the difference between the fair market value of the property or services and the taxpayer’s basis in the CVCs that were used in the transaction. A gain or loss would also arise under the IRS notice if one type of CVC was exchanged for another type of CVC (with the exception of certain Section 1031 exchanges prior to 2018).

Reporting and filing requirements

Taxpayers would thus be required to track each transaction involving CVCs, determining the tax basis of the CVCs involved, and the value of the property or services received, and report each transaction on their U.S. income tax return. In the case of a taxpayer who merely invested in Bitcoin and then held the investment with an occasional sale, the tax issues and reporting requirements would be relatively straightforward. However, many taxpayers bought CVCs on a regular basis, frequently exchanged them for other types of CVCs, lent them to friends, used them on Overstock to buy furniture and other items, invested in Initial Coin Offerings, received CVCs in “airdrops,” and held CVCs long enough to receive additional CVCs in a “hard fork.”

For those taxpayers, keeping track of the basis of all of their CVCs, and the gains and losses from each transaction, proved to be very complicated, if not overwhelming. In addition, many investors in CVCs did not think a CVC was property and thus didn’t require the accounting and reporting expected by the IRS. As a result, many taxpayers may not be fully compliant with their reporting and filing obligations as viewed by the IRS.

IRS enforcement actions

Concerned that taxpayers may not be complying with their reporting and filing requirements, the IRS subpoenaed records on clients of Coinbase, a U.S.-based CVC exchange, and eventually a court enforced the subpoena. More recently, the IRS announced that it has sent or will be sending letters to some 10,000 taxpayers. The first two letters, Letters 6174 and 6174-A, merely informed the recipient that the IRS has information suggesting that the taxpayer either may have entered into CVC transactions that could give rise to a gain or loss and reporting requirements or have entered into CVC transactions. In both cases, the letters ask the recipient to review their CVC transactions to determine if they have fully complied with their reporting and filing requirements.

The third letter, Letter 6173, states that the IRS knows the recipient has entered into CVC transactions and requires the recipient to either file original tax returns (if not previously filed) or amended tax returns, as the case may be, by the date set out in the letter. If recipients believe they are compliant with their reporting and filing obligations, they are required to respond to the letter, setting out a description of the transactions they entered into, how they were reported on the previously filed tax returns, and the reasons why the recipient believes their treatment of the transactions is appropriate and in compliance with U.S. tax laws. The response must be signed under penalty of perjury.

Another example of just how seriously the IRS is taking tax evasion and avoidance with respect to CVCs was the international coalition launched by the IRS with four other countries to investigate CVC crimes, including fraud and money laundering. The coalition, known as the J5, launched in response to the Organization for Economic Cooperation and Development’s request for countries to take action to reduce tax crime. The agencies among the J5 countries will share information and best practices and will also conduct joint investigations. With the cooperation of other countries, the possible information the IRS could have on a taxpayer with respect to their CVC transactions has expanded significantly.

Access to third-party records

Taxpayers who received the third type of letter should be careful in preparing their responses since they won’t necessarily know what information the IRS already has in its possession. In certain cases, the IRS can subpoena banks, financial institutions and other third parties, as it did with Coinbase, to obtain records relating to one or more taxpayers. The IRS may already have information on the CVC transactions that it believes a taxpayer has entered into, and omitting one or more such transactions in the taxpayer’s response to the IRS could give rise to serious penalties, and in some cases civil or criminal fraud charges.

In addition, financial institutions and other third parties may have issued the taxpayer a Form 1099-B, a copy of which would have been sent to the IRS.

Issues to consider

CVC transactions give rise to a number of tax issues, many of which are complicated and not clearly addressed under existing tax law.

  • The first issue is one of recordkeeping, where a list of all CVC transactions is maintained with the tax basis of the CVCs involved, the fair market value of the CVCs at various transaction dates, other property or services involved, the CVCs lent to third parties, and the value of the CVCs received in repayment of the loans, etc.
  • A second issue is whether the exchange of one type of CVC for another type of CVC in years prior to the 2018 tax year qualified for “like-kind” exchange treatment under Section 1031.
  • A third issue is whether the additional CVCs received when a “hard fork” in the applicable blockchain occured should be included in income, or whether instead a portion of the tax basis of the existing CVCs should be reallocated to the new CVCs.
  • A fourth issue is whether the taxpayer should be treated as an investor or a dealer. The answer to this question will determine whether a taxpayer will be able to fully offset losses against gains.
  • A fifth issue is whether a miner of CVCs should recognize income upon the receipt of the CVC or should instead treat the receipt as a nontaxable transaction.
  • Another issue is how to treat CVCs received by a taxpayer in connection with an “airdrop,” the distribution of a crypto token or coin to a wide amount of wallet addresses.
  • Lastly, taxpayers who invested in CVCs through investments in ICOs, and discovered later that the ICO was a scam and the CVCs are now worthless, need to consider how and when to claim a loss on the investment.

Given all of the above issues and many others not raised here, complying with the IRS’s request to justify the taxpayer’s treatment of the CVC transactions within the response time provided in the letter (which will typically be 30 days with one 30-day extension) could prove challenging. The response should address in detail all of the CVC transactions entered into by the taxpayer, starting with the first investment or mining transaction, which could be quite some time ago. Many taxpayers may not have retained the records for all of their CVC transactions, so substantiation of earlier transactions may be challenging.

Next steps

In all three cases, consider urging your clients to take the letters seriously and to seek to comply with their reporting and filing obligations. You may want to actively reach out to your clients to see if one or more of them has received a letter from the IRS and offer to assist them. Remind them that once they receive an IRS notice, ignoring the problem will end very badly and likely be expensive. Particularly in the case of clients who received the third letter, you can remind them that the IRS is taking compliance with tax laws in this area very seriously, and time is of the essence. All transactions should be reviewed and the tax treatment on the tax return, if any, should be compared to the IRS’s view of how such transactions should have been treated.

Certain taxpayers may have reported some, but not all, of their CVC transactions; in other cases, upon detailed review you may determine that the initial treatment may not have been appropriate. In both such cases, the taxpayer may need to both prepare amended tax returns to correct reported transactions, and report previously unreported transactions. At the same time, the taxpayer may need to respond to the IRS addressing the treatment of those CVC transactions that the taxpayer believes are correct. All this within not more than 60 days (a challenge at any time, but a particular challenge now that the September 15 and October 15 filing deadlines are rapidly approaching).

Depending upon the scope of the issues and the frequency of CVC transactions, tax professionals may want to consider working with a knowledgeable tax attorney under a Kovel Letter arrangement, particularly where the client may have significant unreported CVC transactions, or where aggressive reporting positions may have been taken. The use of a Kovel Letter, which may provide confidentiality and attorney-client privilege to communications between the client and you, may allow clients to be more candid with you when discussing their transactions. If the client has entered into transactions with non-U.S. parties or has CVCs on non-U.S. exchanges, the client may feel the IRS cannot get access to information about such transactions and thus may be less inclined to disclose them to you.

If you represent a client who received the third letter and assist them in responding and/or filing late or amended tax returns, you should strongly consider getting a signed letter from them stating that the client has fully and completely disclosed all of the CVC transactions and relevant information to you. You would not want to find out after the fact from the IRS that the client failed to disclose CVC transactions to you and that the IRS was considering taking action against you for filing incorrect amended or late tax returns.

Lastly, consider reviewing any amended tax returns prior to filing them to determine if there are any issues with the treatment of other non-CVC transactions or items reported or omitted on the original tax return, since the IRS in reviewing the CVC transactions may decide to review the entire tax return for accuracy. Better to find out and correct aggressive positions before the amended returns are filed than during the course of a tax audit.

Related Posts:

  • No Related Posts

Another Successful Equity Raise For Kay Properties and Investments, This Time In Winston-Salem …

This material does not constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can only be made by the confidential Private …

LOS ANGELES and WINSTON-SALEM, N.C., March 21, 2019 (GLOBE NEWSWIRE) — Kay Properties and Investments, LLC announces the successful completion of the equity raise for the Winston-Salem Distribution DST.

The Winston-Salem DST is debt free DST offering that owns a 100% occupied FedEx distribution facility in Winston-Salem, NC. The 30,947 square foot property benefits from a long-term net lease with FedEx.

High net worth accredited investors nationwide participated in the offering and were attracted to the debt free nature of the investment. The offering was available to 1031 exchange and direct cash investors under Regulation D Rule 506c.

Contact Kay Properties and Investments at:

(855) 466-5927

info@kpi1031.com

www.kpi1031.com

Kay Properties and Investments, LLC is a national Delaware Statutory Trust (DST) investment firm with offices in Los Angeles, San Diego, San Francisco, Seattle, New York City and Washington DC. Kay Properties team members collectively have over 114 years of real estate experience, are licensed in all 50 states, and have participated in over $9 Billion of DST real estate. Our firm typically has available 15-30 different DST investment options available from various DST sponsor companies for our clients to choose from, many of which are only available exclusively through Kay Properties. Our due diligence process allows our clients to understand the potential pros and cons of each offering in a way that provides them with the facts they need to make their own informed decisions.

Please note that diversification does not guarantee profits or guarantee protection against losses. This material does not constitute an offer to sell or a solicitation of an offer to buy any security. Such offers can only be made by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

IRC Section 1031, IRC Section 1033 and IRC Section 721 are complex tax codes therefore you should consult your tax or legal professional for details regarding your situation. This material is not intended as tax or legal advice.

There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.

Securities offered through registered representatives of WealthForge Securities, LLC , Member FINRA/SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.

Related Posts:

  • No Related Posts

Accruit Expands 1031 Exchange Capabilities and Technology Footprint

Accruit, a financial technology company and leader in the 1031 like-kind exchange industry, has acquired Montana-based American Equity Exchange, …

ENVER/ (PRWEB) July 18, 2018 (STL.News)

Accruit, a financial technology company and leader in the 1031 like-kind exchange industry, has acquired Montana-based American Equity Exchange, founded in 1991 by 1031 veteran, Max A. Hansen. Hansen will join Accruit as an Executive Vice President and continue serving exchange clients from his Montana location.

“American Equity Exchange has contributed significantly to our industry growth and advocacy over the past two decades,” said Accruit CEO Brent Abrahm. “We’re very excited to be joining forces with Max and his seasoned team and growing Accruit’s portfolio of services for our customers.”

In addition to his role as President and CEO of American Equity Exchange, Hansen is an attorney who has practiced law in Montana since 1976. He is a member of the State Bar Associations of California, Utah, Idaho and Montana. He has served multiple terms as the State Bar Delegate and ABA Delegate to the American Bar Association House of Delegates. He is also a long time member of the Tax Section of the ABA and its Sales Exchanges and Basis Committee. Hansen’s work in real estate law and 1031 exchanges led to his founding in 1991 of American Equity Exchange, one of the first qualified intermediary businesses in the Rocky Mountain region.

“Accruit and American Equity Exchange have worked side by side to advocate for the preservation of 1031 property exchanges for the past two decades, and I know that Brent and his team are as committed to quality and customer service as we are,” said Hansen. “Accruit also has the distinction of being the technology leader in the like-kind exchange industry with their unique Exchange Manager application that streamlines the exchange process and provides increased security for our clients. We couldn’t have joined a better team.”

About Accruit

Accruit, LLC is a FinTech company that manages more than $8 billion in money flow annually. Accruit specializes in 1031 like-kind exchange services and escrow, including Digital Vault, an escrow solution for digital assets, and PaySAFE®, providing protection to buyers and sellers in online transactions. Learn more at https://www.accruit.com and https://paysafeescrow.com/.

About American Equity Exchange

American Equity Exchange, Inc. is a nationwide Section 1031 real estate exchange accommodator and qualified intermediary. Since 1991, American Equity Exchange has assisted taxpayers in completing successful tax deferred exchanges nationwide with simultaneous property swaps, delayed exchanges, built-to-suit exchanges and both safe harbor and non-safe harbor parking arrangements. Learn more at http://www.irc1031x.com.

_____

SOURCE: https://www.prweb.com/releases/2018/07/prweb15630068.htm

Related Posts:

  • No Related Posts

Consolidated-Tomoka Announces Closing of Transaction to Sell 70% Interest in New Mitigation …

… interest in the Venture is comprised of certain funds and accounts managed by an investment advisory subsidiary of BlackRock, Inc. (“BlackRock”).

DAYTONA BEACH, Fla., June 11, 2018 (GLOBE NEWSWIRE) — Consolidated-Tomoka Land Co. (NYSE American:CTO) (the “Company”) today announced the closing of the sale of a 70% interest in the entity that holds approximately 2,500 acres of land (the “Land Transaction”) with the intent of creating a wetland mitigation bank (the “Tiger Bay Mitigation Bank” or the “Venture”). The sale of the 70% interest will generate proceeds for the Company of approximately $15.3 million.

The purchaser of the 70% interest in the Venture is comprised of certain funds and accounts managed by an investment advisory subsidiary of BlackRock, Inc. (“BlackRock”). The Company retained an approximately 30% non-controlling interest in the Venture and will also continue as manager of the Venture.

The Tiger Bay Mitigation Bank intends to engage in the creation and sale of both federal and state wetland mitigation credits. These credits will be created pursuant to the applicable permits that will be issued to the Venture from the federal and state regulatory agencies that exercise jurisdiction over the awarding of such credits, but no assurances can be given as to the issuance, marketability or value of the credits. Receipt of the permit from the state regulatory agency occurred on June 8, 2018. The receipt of the remaining permit and the awarding of the initial credits to be created is anticipated to occur prior to the end of the year. Upon satisfaction of certain conditions, each of which is expected to occur prior to the end of the third quarter of 2018, the proceeds will be released to the Company and the Land Transaction will be recognized as a sale of the 70% interest in the Venture. If such conditions are not met within 160 days following the closing of the Land Transaction, BlackRock has a rescission right whereby the transaction may be canceled and the sales proceeds returned to BlackRock along with a cancellation fee paid by the Company to BlackRock and the return of any initial contributions of capital to the Venture by BlackRock.

In connection with its receipt of the regulatory permits, the Tiger Bay Mitigation Bank will be required to place its land into a conservation easement, thus ensuring no future development will be allowed on this large land area inside the City of Daytona Beach, FL. The approximately 2,500 acres in the Tiger Bay Mitigation Bank sits adjacent to the existing 27,395-acre Tiger Bay State Forest.

The Company anticipates using the proceeds from the transaction in a 1031 like-kind exchange as part of the previously announced Aspen acquisition.

About Consolidated-Tomoka Land Co.

Consolidated-Tomoka Land Co. is a Florida-based publicly traded real estate company, which owns a portfolio of income investments in diversified markets in the United States including approximately 2.1 million square feet of income properties, as well as nearly 5,600 acres of land in the Daytona Beach area. Visit our website at www.ctlc.com.

We encourage you to review our most recent investor presentations which are available on our website at www.ctlc.com.

SAFE HARBOR

Certain statements contained in this press release (other than statements of historical fact) are forward-looking statements. Words such as “believe,” “estimate,” “expect,” “intend,” “anticipate,” “will,” “could,” “may,” “should,” “plan,” “potential,” “predict,” “forecast,” “project,” and similar expressions and variations thereof are intended to identify certain of such forward-looking statements, which speak only as of the dates on which they were made, although not all forward-looking statements contain such words. Although forward-looking statements are made based upon management’s expectations and beliefs concerning future developments and their potential effect upon the Company, a number of factors could cause the Company’s actual results to differ materially from those set forth in the forward-looking statements. Such factors may include the completion of 1031 exchange transactions, the availability of investment properties that meet the Company’s investment goals and criteria, the modification of terms of certain land sales agreements, uncertainties associated with obtaining required governmental permits and satisfying other closing conditions for planned acquisitions and sales, as well as the uncertainties and risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as filed with the Securities and Exchange Commission. There can be no assurance that future developments will be in accordance with management’s expectations or that the effect of future developments on the Company will be those anticipated by management. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this release.


Mark E. Patten, Sr. Vice President & Chief Financial Officer

mpatten@ctlc.com

Phone: (386) 944-5643

Facsimile: (386) 274-1223

Related Posts:

  • No Related Posts