Category: Tax Exemption

Bitcoins Are Property, Sayeth The IRS

Posted by Ari Good, JD LLM on May 22, 2014

IRS States Bitcoins Are Property

So the IRS has issued a Notice on the virtual currency known as Bitcoin: It’s not a currency, it’s property. Jolly good, you say, so what? Well, that decision has some major tax implications for the future of what adherents will insist is a virtual currency, or “cryptocurrency”. That has a number of important tax considerations, but for the uninitiated let’s start with the basics, that is, what the heck is Bitcoin?

For these purposes let’s ignore the IRS and grant Bitcoin respect as a “virtual currency”, that is, a medium of exchange, something intangible asset that people can trade for other goods or services (or, other Bitcoins). It owes its existence to computer programmer Satoshi Nakamoto, who created the algorithms related to Bitcoin in and around 2009. It has no tangible existence – one cannot carry a Bitcoin in one’s wallet – but rather depends upon two types of technology for its existence: “peer to peer networking” and “public key encryption”. If you find the technical stuff boring, skip down to “Bitcoins Are Property” below.

Bitcoin Technology

Peer to peer communication is, put simply, stuff that lots and lots of different people on lots and lots of computers do in a “distributed” or decentralized manner, that is, there is no single computer or person that controls what goes on. Napster was one of the first and best known peer to peer networks for sharing music. Millions of different people had songs on their computers. These people used Napster’s software, which you could download onto your computer for free, to share the files over the internet with anyone else also running Napster.

No one was in charge – you simple stood up to be recognized as a “node” on the Napster network, sort of like establishing your own bus stop along a busy route. Then you shared what you had in the same way as you might conduct a pot luck dinner at your local church. The church opens its doors, provides the meeting space (and perhaps one of those big silver coffee makers), and everyone brings their own dishes to share. There are rules: clean up after yourself, don’t show up empty handed, but otherwise no one is in charge of the event. Simple.

Then there’s part two – public key encryption. The deep specifics of this system are beyond the scope of this article (and my comprehension), but in simplest terms PKI is a system by which people can share information securely using a “public” key, an external reference that functions a bit like a PO Box, combined with each user’s “private” key, like the key to that box. You send someone a private letter by referencing their PO Box (which is public), but only the owner can open (or “decrypt”, in the computer world) the letter by using their private key.

These technologies are critical to Bitcoin in that its creators needed a system that allowed them to be traded and exchanged using a decentralized (peer-to-peer) secure (PKI-based) system. When Mr. Nakamoto created his alogrithm he set a finite limit on the number of Bitcoins that will ever exist: 21 million. There are currently around 12 million in circulation, with about 9 million more to be discovered. They are created just as virtually as they are traded: anyone so inclined, and with the computer resources and knowledge to do it, can “mine” Bitcoins by verifying existing Bitcoin transactions. The miners get a commission, in essence, for adding value to the entire virtual monetary world. So, whether you bought your Bitcoins, received them in exchange for goods or services, or mined them you have created or received something of value.

Bretton Woods participants — Tea time at Bretton Woods

What is Currency?

In addition to technology what makes up a currency is, put simply, that people think its a currency, or a “medium of exchange”. If I give you a dollar for a lollipop there’s an immediate understanding that what I am giving you has some intrinsic, quantifiable value (that is, a dollar is worth, surprisingly, $1), that the dollar has an equivalent value in goods or services (lollipops), and that the recipient of my dollar can reuse it to exchange for something else that he might want (say, balloons). This latter part is important. Part of what makes a currency a currency is not only what the original two transacting parties think (our agreement to exchange dollar for lollipop), but that everyone else understands that what both of the parties got has some measurable value. In monetary terms the dollar is therefore not only our “medium of exchange”, but is also recognized as “legal tender” for the transaction. Who decides what is “legal tender”? The simple answer is the government, in part because of the United States Constitution and in part under policies that have evolved over the years. For a fascinating history on what makes money what is it (and who gets to decide that) read up on the exceptional Heritage website.

IRS Rules Bitcoins Are Property

As the use (and trading) of Bitcoins has grown so has the government’s interest in them. Part of why the IRS would care involves whether someone has “acceded to wealth” when they create, sell or exchange a Bitcoin. In other words, has someone to the transaction gotten richer by dealing in Bitcoins rather than a “true” currency? It is a longstanding principle of tax law that such accessions to wealth are “income” which might be taxable to the recipient. I have acceded to wealth, for example, if someone gives me a dollar (for nothing in return), a share of stock or a piece of real estate

Having looked at the issue the IRS came down to the conclusion that Bitcoins are property, not a “currency”. In so doing the US government made using Bitcoin as a medium of exchange much more complicated. This is because, put simply, you, the Bitcoin user, must now keep track of what you paid for your Bitcoin, where it came from, and whether you have tax consequences when you use it to purchase something. This is a whole host of worries you never have to deal with when you use a “true” currency.

The Tax Consequences of Using Bitcoins

So what exactly do you have to track and bother with? The answer, in short, is your “basis”. Basis is just a word. It means “what is my investment in this thing”. If you paid $10 for a share of stock, that is your basis in it (more technically, your “cost basis”). If that stock appreciates to $15 and you sell it, you have “acceded to wealth” by $5, on which you pay tax. So, when it comes to Bitcoins, according to the IRS, go forth and buy, sell and exchange it however you like, however, be sure you track your basis and report your gain (or loss) each time you do it.

This is a huge pain, perhaps by design. Tracking one’s basis in readily exchangeable, intangible things like stock, or now Bitcoins, is extremely complicated. Stock brokers use highly sophisticated software that tracks stock transactions, accounting for all of the Byzantine and upside down rules that govern these transactions. Few, if any, Bitcoin users are prepared for this level of reporting. Figuring out your gain or loss also assumes that you are able to trace exactly which Bitcoin you purchased to use for your cup of coffee. This is similarly difficult given that Bitcoins are “tumbled” into “blocks”, that is, virtually sliced and diced so that it is unclear which Bitcoin you got, or who created or received it. This serves to protect Bitcoin users’ privacy, something the government is viewing with increasing hostility.

Philosophically I am disappointed, though hardly surprised, with this decision. Our entire banking system, really, the entire global economy is in large part based on the dollar as a medium of exchange. That serves an important purpose in that it lends predictability to how oil, carrots or lollipops are priced. There are many “data points”, that is, places to compare, contrast and get an idea of what something should cost. The downside, however, is that it preserves a government’s monopoly on how you do business. Again, this is desirable in many ways, but has a dark side: the government, not you, decides what the currency is worth. The more currency the government prints, the less it can buy or earn in the form of interest. You, the buyer, might not see that the dollar you had yesterday is not the dollar you have today, but those who are exchanging their oil, carrots and lollipops do. Words you hear a lot like “purchasing power” and “inflation” can be tricky to grasp, but are very important to how people live.

What Now?

The matter is not entirely settled. Changing how things work depends on how good the idea is, how strong are the forces against it and who has more patience. Congress, not the IRS, has the ultimate constitutional authority to determine what is considered a “true” currency, and in time this may be the case. Further, the IRS may have done recent Bitcoin purchasers a service. Where you have gains you can also have losses. Just as you accede to wealth through appreciated Bitcoins, you can claim a loss when you didn’t buy so well. As a practical matter, the IRS is entirely unprepared to enforce its new position regarding Bitcoins, as it is unlikely that more than a tiny fraction of this bureaucracy understand them. So, time will tell.

I want to hear from you! Should Bitcoin be considered “currency”? Does the confidentiality of Bitcoin transactions outweigh the risk that they could be used for illicit purposes? Leave a comment, or contact me for a stimulating discussion over a cup of coffee.

Gulfstream Jet Head On Aviation Attorney

Bonus Depreciation For 2015 Aircraft

Posted by Ari Good, JD LLM on May 7, 2014

Bonus Depreciation For 2015 Aircraft

I read an interesting article in Aviation Week about the resilience of the market for the largest business jets. Their resilience as the aircraft of choice for ultra high net worth individuals, governments and corporations is no surprise. One reason for this were the long production cycles for these aircraft. New Gulfstream business jets have always been “built to order” and can take a year or more to complete. The planes on the assembly line during the crash years of 2008-2009 had been on order for some time before, and there was a healthy backlog of others waiting in line at that time.

The tax benefits for these buyers remains as well. Aircraft bonus depreciation deductions, which have largely been phased out going forward still applies to certain large business aircraft placed in service prior to January 1, 2015. This can occur in one of two scenarios, first, if the aircraft is considered “long production property”, or second, if the aircraft otherwise met the requirements for 50% bonus depreciation, part of which required that there was a written binding contract in place for the plane prior to 2014.

Contact me for an analysis of your tax savings.

Ari Good, JD LLM, an aviation tax lawyer is the shareholder of Good Attorneys at Law, P.A. He graduated from the DePaul University College of Law in 1997 and obtained his L.L.M. in Taxation from the University of Florida in 2005. He has helped hundreds of clients to defend themselves against the tax authorities and negotiate their liabilities, and worked with aircraft buyers, sellers and operators in complex tax transactions.

Call us at (786) 235-8371 for detailed information.

State Income Tax Simplification Act

Posted by Ari Good, JD LLM on December 16, 2013

The U.S. Senate to Considers Law to Normalize State Income Tax Rules.

This weekend I ran across some interesting legislation the U.S. Senate is taking a look at: the “Mobile Workforce State Income Tax Simplification Act.” We’ll call it MWSITSA just to make it more confusing. Although the wordy name suggest otherwise, the law’s aim is to simplify paying multiple state income taxes. This new rule could make life easier for people who don’t spend all 365 days in Florida (or any state!).

What’s the Problem?

Comparing state income tax schemes — This seems like a decent analogy

It comes as no surprise to those paying taxes in multiple states, but there’s a serious problem with the current state income tax system. Each state has their own particular rules when deciding whether you owe it income taxes and how much. Some states require a payment if you worked there for even a single day! The more generous states at least require a multiple week stay before you trigger a demand to contribute to their treasury.

This doesn’t factor in the problem of calculating how much you owe. Some states fairly look at the time you’ve been there when creating a number. Others have a floor for their tax ransom (a few hundred dollars to over a thousand) that doesn’t take into account the actual time you’ve spent in the state.

This isn’t just a problem for employees who cross state lines. It can be a administrative nightmare for employers. Business owners must account for their employees’ activities when withholding money on paychecks. Imagine the fun when they have to figure this out for a myriad of states. The self-employed in this situation also just better have a qualified CPA on speed dial.

The Guts of a Solution

The MWSITSA seeks to bring order to the chaotic state income tax landscape. But it’s a modest solution.

Federal law would normalize the time trigger for payment to state income tax at 30 days. At that time, the state’s normal rules for how much to pay kicks in. This does away with “gotcha” state rules. Those states that demand a tax payment for even 1 day of work in their state. It, however, doesn’t fix the problem of tax floors. That working in state, regardless of how much time is spent there, requires some minimum payment. The law also doesn’t touch the variations in complex state tax schemes. Namely, the hoops one must jump through when coming to a tax figure.

The law does let people deduct income subject to tax in other states, from income subject to tax in their home state (not much help to those who have Florida as their home state). This sounds like a great idea, but it’s already how the tax system works.

Florida is my Home State!

MWSITSA would be a nice financial and resource boon for workers and businesses who call Florida their home state. No state income tax unless you’re in another state for 30 days!

The time spent in complying with various state income tax rules is not a light burden. Hours can be spent on figuring out the taxes due in just one state. Multiply that by the 41 states that have different tax schemes and multiple workers, and the problem is apparent. Is the drain on business resources really worth the revenue states generate? At what point does the cost of the implementing various state income taxes outweigh the benefit? It’s likely that many workers and businesses simply ignore paying state income tax, whether through ignorance or avoidance.

It seems to this writer that MWSITSA is a good start to remedying these issues. To fully address the problem, however, the formula for calculating state income tax must be uniform throughout the nation in all aspects. If you pay $1,000 in one state for their income tax for a certain number of days worked, you should pay that same amount in the neighboring state, all things being equal.

For a more detailed look at these issues, the Council on State Income Taxation has an informative website here.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the shareholder of Good Attorneys at Law, P.A. He graduated from the DePaul University College of Law in 1997 and obtained his L.L.M. in Taxation from the University of Florida.

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Updated Florida Form to Report Sales and Use tax on Aircraft

Posted by Ari Good, JD LLM on October 8, 2013

Florida Introduces New Form to Report Sales and Use Tax on Aircraft

The Florida Department of Revenue (FL DOR) has updated its reporting form on the sale and use of aircraft in Florida. Form DR-15AIR (Sales and Use Tax Return for Aircraft) replaces Form DR-42A (Ownership Declaration and Sales and Use Tax Report on Aircraft). The new form provides explicit guidance on when to report taxes on the sale and use of aircraft in Florida.

When Form DR-15AIR Should be Used.

An individual should report sales and use tax on the purchase of aircraft when they don’t pay Florida’s sales tax to the seller. Form DR-15AIR clarifies the three (3) situations when an individual should instead pay a 6% “use” tax:

1. An individual purchases an aircraft from a person who is not a registered aircraft dealer and the sale or delivery of the aircraft occurs in Florida;

2. An individual purchases an aircraft in another state, territory of the United States, or District of Columbia and is brought into Florida within six months of the purchase date; or

3. An individual purchases an aircraft in a foreign country and is brought into Florida at any time.

This use tax is in addition to any county discretionary sales surtax. The discretionary sales tax applies to the first $5,000 of the purchase price and rates vary by county.

When Sales and Use Tax is Due.

Florida Sales and Use Tax — . Taxes Not Included

Florida’s use tax is technically due when an individual brings an aircraft into Florida for use or storage. The corresponding tax returns and tax payments, however, are due only on the 1st day of the month after the actual month when:

1. The airaft was purchased in Florida;

2. The aircraft was delivered to a Florida location; or

3. The aircraft enters Florida for use or storage.

The tax returns and tax payments are late if coming after the 20th in the month they are due. Late returns and payments are penalized a minimum of $50 or 10% of the amount due, whichever is less. Interest is dues on late payments as well.

Exceptions to Sales and Use Tax.

Exceptions to Florida’s sales and use tax on aircraft continue to apply, including:

1. The value of an aircraft, boat, mobile home, or motor vehicle an individual trades in reduces the taxable purchase amount. The person accepting the trade in and selling the aircraft must be the same.

2. An individual removes an aircraft purchased in Florida from the state within 10 days after the date of purchase, or 20 days after completion of repairs or alterations.

3. A credit for taxes pad in another state, territory of the U.S., or Washington D.C. No credit is available for taxes paid in another country.

4. An exemption from the tax for non-residents of Florida when their aircraft enter and remain in Florida for 20 days or less during the six-month period after aircraft purchase. This exemption also applies to non-resident owned aircraft that enter Florida for the purposes of flight training, repairs, alterations, refitting, or modification.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the Shareholder of Good Attorneys At Law, P.A. He graduated from the DePaul University College of Law in 1997 and received his LL.M. in Taxation from the University of Florida.

Contact us toll free at (877) 771-1131 or by email to info@goodattorneysatlaw.com.

Tax Implications of SCOTUS’ DOMA Decision

Posted by Ari Good, JD LLM on September 25, 2013

Tax Implications of U.S. Supreme Court’s Decision on Same Sex Marriage (DOMA)

Surviving Spouse of Same-Sex Marriage Sues U.S. Government over Taxes

Edith Windsor and Thea Spyer were lawfully married in 2007 in Ontario, Canada but lived in New York. Spyer died two years later and left her estate to Windsor. Windsor attempted to claim a the “surviving spouse” exemption from the death tax when Spyer passed. The Defense of Marriage Act (DOMA), however, prevented her from taking the exemption. The term “spouse,” according to DOMA, applies only to the marriage between a man and woman. The IRS relied upon DOMA to rule that the surviving spouse exemption did not apply to Windsor, no matter where she married. Windsor ended up with a $363,053 death tax bill, causing her to sue the federal government.

U.S. Supreme Court Strikes Down DOMA’s Definition of “Spouse”

SCOTUS DOMA Decision — SCOTUS’ DOMA Decision Provides New Tax Benefits for Same-Sex Couples

The U.S. Supreme Court heard Windsor’s case and ruled that DOMA’s definition of “spouse” violated a myriad of Constitutional principles. The Court’s decision authorized same-sex couples, who are legally married, to claim the surviving spouse exemption. The U.S. Treasury Department and IRS changed its tax policy as a result of the decision. They will recognize same-sex married couples as married for federal tax purposes. This is true even if the couple moves to a state that doesn’t recognize same-sex marriage. This treatment applies to all federal taxes, not just the surviving spouses exemption.

Tax Implications of Federal Recognition of Married Same-Sex Couples

The U.S. v. Windsor case will provide a number of new tax benefits for same-sex couples:

Annual Gift Tax Exemption: An individual can give another person up $14,000 (as of 2013) without tax consequences. The gift can be cash, property, or other assets. Anything above $14,000 must be reported to the IRS. Married couples, however, may give unlimited amounts to their spouse without tax consequences.
Death Tax Exemption: An individual can leave a non-spouse up to $5.25 million upon their death without tax consequences. A married individual, however, can leave their spouse an unlimited amount without tax consequences.
Unified Credit: Tax law combines the annual gift tax exemption and death tax exemption to create the “Unified Credit.” Untaxed amounts given annually as a gift count towards the $5.25 million that is exempt from the death tax. Married couples, however, don’t face limits on annual or lifetime gifts or transfers of property to the spouse. This includes the Unified Credit limitation.
Portability of Marital Exemption: The unused portion of $5.25 death tax exemption passes from the deceased spouse to the surviving spouse. This means a surviving spouse can give up to $10.5 million before the death tax kicks in (depending on how much of the death tax exemption the deceased spouse used).
Gift Splitting: A gift by a married individual only counts 50% towards the annual gift tax exemption. The IRS treats the married couple as a single tax entity when it comes to this exemption. This means a married individual can give up to $28,000 without tax consequences. Their spouse, though, could not give any amount as a gift that particular year without facing tax consequences.