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IRS

Taxation of cryptocurrency forks and airdrops

In Revenue Ruling 2019-24 the IRS considered what are the tax consequences of crptocurrency forks and airdrops.  Those of us who hold, or held, cryptocurrency during widely-followed forks, such as Bitcoin’s 2018 fork into Bitcoin and Bitcoin Cash, know the drill.  The development community can’t agree on fundamental issues about the particular cryptocurrency, such as the amount of data each “block” should carry and how often such blocks should be validated on the blockchain.  Rather than compromising, one faction or the other generates a new code base using the existing coin and adds (or subtracts) their modifications, later releasing the new code into the world as a new coin or token.  Voila, the “fork” (as in a fork in the road) has birthed a new cryptocurrency on its very own blockchain, to thrive or survive alongside its “parent” coin.  Sometimes (as has been the case with Bitcoin Cash), that new coin thrives quite handsomely, resulting in increased wealth in the hands of the HODLer.  Money for nothing?  According to the IRS, actually, no.

The Revenue Ruling’s definitions of cryptocurrency and the mechanics of forking and airdrops is, to the credit of the IRS, spot on.  Someone has been doing their homework into what exactly they are looking at, which is important, since bad inputs make for bad outputs.  In summary, the Ruling notes that the end result of the fork is one of two scenarios:  (i) the taxpayer receives the new cryptocurrency, which is credited to his account or otherwise received by him (via “airdrop”, in the terms of the opinion); or (ii) the taxpayer does not receive the new crypto for any number of reasons, the one cited being where the exchange on which the taxpayer had her pre-fork crypto does not support the new coin, and that crypto-holder’s rights vanish into thin air.

The first conclusion the IRS comes to, which is that there is gross income to the taxpayer where he or she receives the forked coin is, in my view, correct.  Under classic income tax laws there is a clear “accession to wealth”, that is, you have more money in your pocket (perhaps a lot more) post-fork than pre-fork.

Not all income, however, is created equal in the eyes of the tax law.  Once you determine you have income you must then consider the character of that income, that is, capital, ordinary, or something else.  There are books written about these distinctions.  For our purposes, “ordinary” income includes things like a salary or proceeds from the sale of your business’ inventory.  Capital gain (or loss for that matter), in contrast, relates to purchases and sales of “capital assets”.  Capital assets are, for most people, their investments, perhaps including real estate, stocks and bonds, and cryptocurrency.  This distinction is critical, since different types of income are subject to different income tax rates.

The timing matters too – ordinary income is recognized the minute you either receive it (for cash basis taxpayers) or when “all events” have occurred (for accrual basis taxpayers) that result in the taxpayer having dominion and control over the assets.  For capital assets there is a taxable event where the property is “sold or exchanged”, that is, in some cases, mere receipt of a capital asset will not always trigger tax consequences.  Rather, the law keeps a kind of “tally” of the amount of tax you will have to pay (at some point) in what’s called the “basis” of the asset.  The “basis”, in plain language, is the amount of your investment in an asset.  If the price at sale is above your basis, voila, capital gain.  If the price is below it, capital loss.

Let’s take stock splits as an example.  Let’s say you bought 1 share of Apple (AAPL) at $300.00 (everyone seems to like using Apple as an example). Assume for purposes of this example that you are not a dealer in securities or a professional trader.  What do we know about AAPL in your hands?  (1) That is is (in all likelihood) a “capital asset” (an investment outside of your ordinary trade or business); and (2) Your “cost basis” is $300.00.  As of this evening AAPL is trading at around $317.00.  What do we know now?  We know that, given your basis of $300.00, you now have $17.00 of profit.  If you sold AAPL at $317.00, you would have $17.00 of capital gain.

Fine.  Now assume that AAPL splits two for one, that is, all shareholders of AAPL will receive double the number of their shares, so now you have two shares of AAPL.  Here’s the trick:  your basis in each of the shares is also cut in half.  Therefore, you now have two shares of AAPL.  What’s the price of each?  $158.50.  What’s your basis in each?  $150.00.  What if you sold your two post-split shares of AAPL?  What would your gain be?  Still…$17.00.  See?  Your basis “account” adjusted to reflect the economic reality of the transaction, and spread your initial $300.00 investment across the two shares.

Now imagine that instead of splitting, AAPL pays you a cash dividend of $1.00 per share every quarter (it’s actually around $0.77, but let’s use round numbers).  Dividends are, unlike shares received in a stock split, ordinary income (unless “qualified”, which we won’t get into here).  OK, so why don’t we just treat the dividend like a capital asset, and adjust the basis without having a taxable event?  Well, because the law says so, and perhaps in part because dividends are paid in cash.

The question then is, did the IRS get the second part right, that is, the character of the income that you receive when you receive airdropped tokens from a hard fork.  In my opinion, no.

Forked tokens can feel like “manna from heaven” as the saying goes, but in my opinion they much more closely resemble stock splits than dividends.  My opinion is based on what the IRS has told us for many years – that cryptocurrency is property, not money.  Property held as a capital asset that produces more property (like a stock split) should be treated in the same manner as a stock split, and not as if the forked coins are the same as cash, which they most certainly are not.

For starters, the recipient of the forked coin has extreme price risk from the get-go.  It is not uncommon for a forked coin to spike wildly upon receipt (which, according to the opinion, is then its taxable value) only to collapse violently thereafter.  The token holder may not stand a chance – if you’re not in front of your computer ready, willing and able to sell at the precise moment the coin is received – you may end up with a big tax bill AND an asset that has declined significantly in value.  This is neither consistent nor fair.  A true dividend does not have this inherent risk.  True, currencies are always fluctuating in value against other currencies (and gold), but in the short term, your $1.00 AAPL cash dividend is going to buy the same amount of coffee (perhaps half a cup) whether you’re at your computer when its paid or not.

Second, the IRS has further confounded and complicated cryptocurrency accounting for everyone.  It is bad enough that technically, you have to report either gain or loss for the use (that is, “sale or exchange”, remember?) of crypto for anything, including our proverbial cup of coffee.  Now, you must track the basis of assets with different characters.  This will be a huge challenge for developers of crypto accounting and recordkeeping software, thereby making the neat and clean records the IRS wants taxpayers to keep all the more elusive, and often inaccurate.

In essence, the IRS is looking to have it all ways – cryptocurrency is property subject to the reporting and accounting for capital gain and loss, except when it’s not.  And by the way, if you DO decide to hang on to your airdropped coins, only to sell them later if the price goes way up, you may also have capital gain to pay later, on the very same asset that gave rise to ordinary income upon receipt, even though that asset was really capital in nature all along.

So, brush off your spreadsheets.  Between cold storage wallets, intra-exchange transfers, and now, airdropped, forked coins, it will continue to be a challenge to stay in compliance in the crypto world.

(c) 2020 Good Attorneys At Law, PA

Tax penalties and health care coverage

Obamacare (Affordable Care Act) Taxes and Penalties

Penalties Increase for Individuals and for Employers under Obamacare (Affordable Care Act)

Tax penalties and health care coverage
Play or pay

As promised, Obamacare taxes and penalties for not having health insurance are on the rise.  The following is a summary of  what to know:

 

Individual Health Care Penalties

The penalty for not having minimum essential coverage [MEC, ACA defined] in 2016 will increase to the following:

· The greater of (a) 2.5% of taxpayer’s household income over the filing threshold or (b) $695 per person ($347.50 per child under age 18) ($2,085 per family whichever is higher) OR the cost of the national average premium for a Bronze level health plan.
· Remember to save your 1095-A if you are a part of the Exchange. You should receive in January 2016 and will need it for your tax return.

Note : Open enrollment for 2016 coverage begins on November 1, 2015.

Employer Health Care Penalties

The Trade Preferences Extension Act of 2015 significantly increases penalties for companies failing to file correct information, returns, or provide correct payee statements. Penalties increased from $100 to $250 per return or statement with a cap increase up to $3 million.
Beginning in 2016, all companies with 50 or more Full Time Equivalent employees [FTE, defined by ACA] are required to report to the IRS whether they offer their FTE and their qualified dependents the opportunity to enroll in MEC under an employer-sponsored plan. Companies are required to file a transmittal report (Form 1094-C) which summarizes the Forms 1095-C which must be provided for each FTE employee who was employed for one or more months during 2015.

Employers who have fewer than 50 FTE but who sponsor a self-insured group plan must also file reports 1094-B for transmittal and a 1095-B to each employee.

Information that must reported to the IRS includes:
· The name, address, and employer identification number of the provider.
· The statement recipient’s name, address, and taxpayer identification number, or date of birth if a TIN is not available. If the statement recipient is not enrolled in the coverage, providers may, but are not required to, report the TIN.
· The name and TIN, or date of birth if a TIN is not available, of each individual covered under the policy or program and the months for which the individual was enrolled in coverage and entitled to receive benefits.

Employers should have steps and infrastructure in place to gather information reflecting coverage offered in plan year 2015, which can include monthly tracking.

Information you need to track:
· Date coverage is offered
· Proof of offering
· Employee Share of the Lowest Cost Monthly Premium for Self-only Coverage

Important Dates to Note:
· February 1, 2016 – Employee Statements are due
· February 29, 2016 – IRS Statements due if filing by paper
· March 31, 2016 – IRS Statements due if filing electronically (must file electronically if filing 250 or more forms)

Note: Employers who have fewer than 50 FTE and are not offering a self-insured group plan have no filing requirements.

band performing

Recording Industry Contracts – What To Look For

band performing
Negotiate your recording industry contract

The Ins and Outs of Recording Industry Contracts

One of the most exciting moments in an artist’s career is when he or she receives his first recording contract.  This can represent your  “big break” and an opportunity to market your music and gain more fans, followers and ultimately sales. The smart artist carefully reviews his contract before committing to any music marketing company, recording industry contract, or other agreement.  This is extremely important.  Committing yourself to the wrong contract can limit your artistic freedom, obligate you to produce a nearly impossible amount of music in a short period of time, and restrict you from working with your favorite musicians or producers. Here is a list for some common things to look out for:

Your minimum recording commitment

In summary, your minimum recording commitment (or “MRC”) spells out how much music you have to produce for the marketing company or record label in exchange for their services.  The MRC can be phrased in terms of the number of singles or number of albums, or sometimes both.  Have a good idea based on your experience of how long it takes you to produce a song or album.  You  will need to have enough time to create a quality product without sacrificing your artistic integrity, which is what brought you the contract in the first place.  The timeframe for meeting your MRC can often be pretty tight, which brings us to our next point:

The Recording Industry Contract Term

Rather than being for a year or for a certain number of albums, many recording industry contracts create several back-to-back terms that obligate you to meet your MRC within each term.  These can be as short as six months.  The contract typically gives the label or marketing company the option, but not the obligation, to cancel or renew the contract at the end of the each term while keeping the work you have produced thus far.  This often a pretty one-sided deal.  You may not have the same right to cancel if you’re unhappy with the relationship.  Ideally you would want either one of you to have the option to cancel the relationship after each successive term or extend the whole term in the recording industry contract so there is more of a mutual commitment.

Getting a Win-Win Deal

You scratch my back I’ll scratch yours as they say.  Many recording industry contracts are pretty thin on detail when it comes to what exactly the record label or marketing company will do for you.  You should have a very clear idea of what you want out of the deal and how the company plans to give it to you.  Are you looking for social media promotion?  Bookings?  Paying for your production and CD costs?  Perfecting your listings on iTunes, submitting your material to Spotify and Pandora and registering you with the performing rights organizations?  These are all critical parts of marketing your music.  Keep in mind too that most of the money in the music industry is made in live performances and merchandising rather than unit sales.  Be aware of  smaller companies that claim to have hot “industry contacts”.  Such companies often claim that they’ve worked with big artists and launched their careers.  Obviously these claims may be true, and this might be a great relationship for you, just be aware of claims that are very hard to prove.  Do your homework. What does their website look like?  How long have they been in business?  Exactly which artists having worked with and is their name on those artists websites or CDs, etc.

Music Industry Relationships and Leverage

Always know who has more bargaining power in any relationship.  If you’re looking at a contract from Virgin Music or Sony, suffice it to say that there’s probably not a whole lot you can do in terms of negotiating terms, and you are probably lucky to have such an opportunity.  If you’re dealing with a smaller company though, know that they might be hungry just as you are, and you may have more power negotiating terms if you already have an established fan base, merchandising relationships, and other things going for you that make you easier to market.  It’s sort of like the joke about getting a loan – the only people who get them are those who don’t need them.  The best contracts go to artists that have already done a lot for themselves and already have a following.

Getting the right advice in advance can make the difference between hitting it big and ending up with an impossible situation.  Call me for consultation and contract review.  A little good advice and perspective at the beginning can save you a lot of headaches down the road and open you up to  win-win deals that will deliver what you’re really looking for.

Ari Good, Esq.

(786) 235-8371

IRS tax deductions

Congress Mulls Extending Tax Deductions

Congress Considers Extending Tax Deductions

IRS tax deductions
Bringing your deductions back

There have been significant recent efforts in Congress to renew tax extenders which expired at the end of 2013. All indications are that these provisions will likely be retroactively reinstated to January 1, 2014. The bills should be finalized by no later than November after the mid-term elections.

Key extended tax deductions would include:

· Above-the-line deduction of up to $250 for expenses of elementary and secondary school teachers

· Exclusion from income for mortgage debt forgiveness on primary residence

· Deduction for mortgage insurance premiums

· Deduction for state and local general sales taxes

· Above-the-line deduction for higher education expenses (Tuition & Fees Deduction)

· Tax-free distributions that go directly from Individual Retirement Accounts (IRA’s) to charitable organizations

· 10% credit for purchases (up to $500) of energy efficient improvements to existing homes
Business Provisions

· Research and experimentation tax credit

· 50% bonus depreciation on purchases of new equipment and fixed assets (with special rules for vehicles)

· Increased section 179 expensing limits ($500,000) (Currently only $25,000).

Not surprisingly these are among the most popular of the tax deductions that benefit both businesses and individuals.

Stay posted.

Ari Good, JD LL.M. is a Miami tax attorney advising clients in income tax, employment tax, aviation tax, entertainment tax and IRS tax law issues.  A top tax attorney in Miami, Mr. Good fights the IRS and Florida Department of Revenue in tax litigation and tax negotiation matters.

Call me now: (786) 235-8371

Hangar vs. Tie-Down: Where to park your Aircraft

Although overlooked at times, where you store your aircraft is a very important part of being a responsible owner. Whether you decide to hangar it or tie it down, where and how you store your plane can change its re-sale value, extend its longevity, or conversely, cost you a lot of unnecessary expenses. It all depends on how you look at it. So let’s look at the pros and cons of storing your aircraft in a hangar versus keeping it tied down outside.

Obviously hangars can cost a lot of money. Money no object who wouldn’t want the private suite?  While prices differ, hangaring your aircraft can cost you up to $500-$600 per month, which is hundreds more than keeping it tied down outside. Tie-down fees can run anywhere from $50-$100 per month. There are reasons for this.. A hangar offers far better protection from natural elements, therefore reducing potential damage and devaluation of your plane. Tying your aircraft down outside, while costing far less money, will leave it exposed. This may be a wise financial decision if you are in an area where inclement weather is rarely an issue, not so much if you’re basking in the Florida sun or braving a New York winter. Always remember to check prices with FBOs before you land, as prices tend to change based on location.

There are two main types of hangars to consider should you choose that option. The most common single-plane hangar setup is known as a “t-hangar” for its shapeA t-hanger is designed to fit the shape of the body of your plane. It’s narrow in the back for the tail and wide enough for the wings in the front. The other is called a “shared hangar”. Shared hangars are more affordable, though with many planes sharing the same space you run a greater risk of “hangar rash”. Poorly maintained hangars or bad planning can increase your risks of hangar rash.

Tying down your aircraft, if done properly, can be a cost-efficient, and perfectly reasonable way to park at an airport. The best way to do this is known as the 3-point tie-down. The 3-point tie-down involves securely fastening your aircraft by both wings and the tail. If done right this will keep your plane from tipping due to jet/prop efflux or strong winds. Keeping your aircraft tied down rather than hangared can save you thousands of dollars per year, but again, it could cost you more in the long run due to repairs and maintenance in tough climates.

Whether you choose to hangar your aircraft or tie it downthe most important factor is that you feel comfortable where you keep your plane. Peace of mind goes a long way in aviation, and keeping your aircraft in good condition is essential becoming a confident pilot or owner. Always remember to check prices with your destination’s FBOs, and go with what makes you feel the most secure about your aircraft. With proper planning and wise decision-making, you’ll feel more confident about your craft, and how you fly.

Contact us for more information or recommendations to industry experts who can guide you in selecting your best options and help you plan your flights.