Expansion of Cryptocurrency Reporting

Investing in cryptocurrency is becoming increasingly mainstream and will likely become a permanent part of the U.S. financial ecosystem.  There are currently over 8,600 forms of cryptocurrency, with Bitcoin being by far the most popular, commanding over 68% of the market share.  Major retailers such as Microsoft, Home Depot, and Overstock are now accepting Bitcoin as payment for goods and services. 

For years, investors have avoided paying capital gains tax on cryptocurrency trades and sales.  This is due to the lack of financial reporting by cryptocurrency exchange brokers.  IRS Commissioner Charles Rettig estimates the annual “tax gap” to be $1 trillion, in part from unregulated cryptocurrency.  Congress is attempting to decrease the tax gap by expanding the reporting requirements for cryptocurrency transactions.  

On August 10, 2021, the Senate passed the Infrastructure Investment and Jobs Act.  As of the date of this writing, the bill still needs to be approved by the House and signed off by the President.  The bill contains a provision to expand reporting requirements for brokers of cryptocurrencies.  The expanded reporting is expected to generate $28 billion in tax revenue over the next 10 years. 

The proposed Act defines cryptocurrency as a digital asset which is a specified security.  Brokers of specified securities are required to provide customer information to the IRS including the customer’s cost basis and any gain or loss realized when the customer sells or exchanges the digital asset.  This expansion to include cryptocurrency as a specified security would go into effect for assets acquired on or after January 1, 2023.  If this bill is signed into law, you can expect to receive 1099 broker statements in early 2024 reporting your cryptocurrency gains and losses.  These gains and losses would be reported on your 2023 tax return.

Despite current absence of 1099 reporting, crypto transactions create taxable events that must be reported.

When do you owe taxes on your crypto?  Taxable events relating to cryptocurrency include the following:

  • Trading crypto for U.S. Dollar
  • Trading one crypto for another crypto
  • Using crypto to purchase goods or services
  • Mining crypto
  • Receiving crypto as a reward

How are crypto transactions taxed?  Here is what happens when cryptocurrency is traded or sold:

  • Gain or loss is realized from the trade or sale
  • The gain or loss is measured by the change in dollar value between the cost basis when the crypto is purchased and the proceeds received when the crypto is disposed
  • If the crypto was held for one year or less, the gain or loss is considered short-term and is taxed at ordinary income tax rates
  • If the crypto was held for more than one year, the gain or loss is considered long-term and is taxed at capital gains tax rates generally ranging from 15% to 23.8%, depending on your overall income

How can taxes on crypto gains be minimized?  Many of the tax reducing strategies available for publicly traded securities are also available for cryptocurrencies.  Some strategies are:

  • Engaging in Tax Loss Harvesting:  Sell cryptocurrency that has decreased in value to offset gains
  • Investing for the Long Term:  If possible, hold cryptocurrency for more than a year before selling at a gain to take advantage of lower long-term capital gains rates
  • Donating to Charity:  By donating appreciated digital assets directly to a charity, you avoid paying capital gains tax on the gain and enjoy a tax deduction equal to the fair market value of the cryptocurrency (assuming you itemize your deductions)

The world of cryptocurrency is still evolving, but rest assured that the experts at Ketel Thorstenson, LLP are here to help you along the way.  Please contact us with any questions or concerns.

September 24, 2021

Provisions in Biden’s Tax Proposal that May Cost You Money

President Biden’s proposed tax plans contain many provisions that could affect the amount of income tax you pay in the near future. His plans contain provisions to increase taxes for wealthier Americans which will help fund infrastructure spending and proposed tax cuts for lower income Americans. 

The following highlights from Biden’s proposal may increase the amount of tax you owe:

Increase of top tax bracket

Currently, the top tax rate is 37%. Biden proposes to increase that to 39.6%. The 39.6% rate would apply to taxable income over $509,300 for married filing joint filers, $452,700 for single filers, $481,000 for head of household filers, and $254,650 for married filing separate filers beginning in tax year 2022.

Increase in long-term capital gains rate

Currently, long-term capital gains and qualified dividends are taxed at a maximum rate of 20% (or 23.8% including the net investment income tax if applicable). Biden proposes to increase this to 39.6% (43.4% including the net investment income tax) for taxpayers with taxable income over $1 million ($500,000 for married filing separately). If adopted, the increased rate is expected to be retroactive to April 28, 2021. This increase will be particularly painful for large one-time capital gains from selling a business or piece of property. Making matters worse, often long-term gains are purely as a result of inflation, and not really economic income.

Expand self-employment taxes

Under current law, many loopholes exist for pass-through business owners to avoid paying self-employment taxes. Self-employment earnings are taxed at a rate of 12.4% for Social Security tax (limited to $142,800 of earnings in 2021) and 2.9% for Medicare tax (unlimited), plus an additional 0.9% Medicare tax for high income taxpayers. 

Limited partners in a partnership are statutorily exempt from paying self-employment taxes on their share of the partnership income. Some partners claim limited partner status rather than general partner to avoid paying self-employment taxes. Some LLC members avoid paying self-employment taxes by claiming the treatment of a limited partner. While S-corporation shareholders are required to pay themselves a fair wage which is subject to employment taxes, their distributive share of the income is not subject to self-employment taxes. 

Biden plans to impose self-employment taxes on limited partners, LLC members, and S-corporation owners who materially participate in their business to the extent the income exceeds $400,000. This would be effective beginning in 2022. 

Expand net investment income tax (NIIT)

Under current law, taxpayers with income over certain thresholds ($200,000 for single and head of household and $250,000 for joint filers) are subject to a 3.8% tax on net investment income. Net investment income consists of interest, dividends, rents, capital gains, and income from businesses in which the taxpayer does not materially participate. 

The proposal is to make all pass-through business income (even if you actively participate) subject to the 3.8% NIIT for taxpayers with adjusted gross income (AGI) greater than $400,000. If you are an owner in a pass-through business (such as a partnership, LLC, or S-corporation) and your AGI exceeds $400,000, your business income from these sources would be subject to this additional tax.

Increase IRS enforcement efforts

Some experts estimate that the tax gap (the difference between the amount of tax due and the amount of tax paid) is as high as $1 trillion per year. Biden would like to give the IRS an additional $80 billion over ten years to increase IRS enforcement actions. This includes increasing audits, updating outdated technology, and expanding financial reporting requirements for financial institutions. The risk of being audited is expected to increase for taxpayers with taxable income over $400,000.

Limitation on deferred gains from Section 1031 like-kind exchanges

Currently, taxpayers owning real property such as land and buildings, either used in a trade or business or held for investment, can exchange the property for another “like-kind” real property and enjoy the benefit of deferring taxable gain (assuming certain conditions are met). The proposal is to limit the amount of deferred gain up to an aggregate maximum of $500,000 for single taxpayers and $1 million for married filing joint taxpayers.

Making the limitation of excess business losses permanent

The 2017 federal tax reform imposed a limitation on the amount of losses derived from an active trade or business that a taxpayer can use to offset other income such as wages and investment income. The CARES Act repealed this limitation for tax years 2018 through 2020. The limitation goes back into effect for tax year 2021 and is set to expire after tax year 2026. In 2021, excess business losses greater than $524,000 for married filing jointly and $262,000 for all other taxpayers will be suspended and carried forward to the next year. Biden proposes to make this limitation permanent.

While these are all just proposed changes and have not yet been made into law, your advisors at Ketel Thorstenson want to make you aware of potential tax law changes that may affect you and your business. Please contact Ketel Thorstenson with any questions or concerns.

June 28, 2021

Tax Tip:100% Meals Deduction for 2021 and 2022

While qualifying business meals remain 50% deductible for 2020, the Consolidated Appropriations Act of 2021 (CAA) has expanded the deductibility of business meals and beverages to 100% for those provided by a restaurant in 2021 and 2022.

To be deductible, food and beverage expenses must meet all of the following criteria:

  • The expense is an ordinary and necessary expense of carrying on a trade or business
  • The expense must not be lavish or extravagant under the circumstances
  • The taxpayer, or an employee of the taxpayer, must be present when the food and beverages are provided
  • The food and beverages are provided to the taxpayer or a business associate, such as a customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.

For example, take-out from a restaurant is 100% deductible, but a meal catered by a grocery store would only be 50% deductible.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation affects or questions.

March 3, 2021

COVID-19 Related Retirement Distributions

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (passed in March of 2020) contains many provisions intended to reduce taxpayers’ financial hardships associated with the COVID-19 pandemic.  One of the provisions of the Act concerns certain withdrawals from retirement accounts in 2020.  Normally, withdrawals from retirement accounts by taxpayers under age 59 ½ are subject to a 10% early withdrawal penalty.  Under the CARES Act, if certain requirements are met, the 10% penalty does not apply.

The maximum amount that may be withdrawn penalty-free is $100,000 per individual.  In order to qualify for penalty-free withdrawal, the following requirements must be met:

  • The distribution must be made to a qualified individual.  A qualified individual must meet one of the following requirements:
    • Diagnosis of COVID-19 by a test approved by the CDC
    • Experienced adverse financial consequences due to
      • being quarantined, furloughed or laid off
      • having work hours or pay reduced
      • having been unable to work due to a lack of child care
      • having owned or operated a business that has been closed
      • having a reduction in self-employment income
      • having a job offer rescinded or a start date delayed
  • The distribution must be made from an eligible retirement plan such as an IRA, 401(k), 401(a), 403(a), 403(b), or 457(b).
  • The distribution must have been made between January 1, 2020 and December 31, 2020.

While not subject the 10% penalty, the distribution is still taxable.  The CARES Act provides the option of reporting the entire distribution on the 2020 tax return or reporting the distribution ratably over three years.  For example, if you took retirement distributions of $75,000 in 2020, you would have the option to report $25,000 of income in each 2020, 2021, and 2022. 

In addition, the CARES Act allows a taxpayer to recontribute any portion of a COVID-19 related distribution to a qualified plan within three years from the date of receipt.  Any amount recontributed is considered a tax-free rollover and excluded from income.  Because of the three-year recontribution window, tax planning opportunities exist.  For example, if the funds are recontributed prior to filing the 2020 tax return, they are excluded from income.  This can be as late as October 15, 2021 if the return is extended.  If the funds are recontributed after filing the 2020 return, an amended return may need to be filed.  Several timing scenarios may occur.  Consult your tax advisor to determine the best course of action for your specific situation.

January 7, 2021

Update on SD COVID Small Business and Non-Profit Grants

If you applied for Round One and/or Round Two of the South Dakota Small Business Grant Program, you may be expecting to receive your grant award this week.  While some businesses have begun receiving grant funds, many are still waiting.  The grant office initially stated that all grants would be awarded by December 30, 2020.  However, due to the addition of the second round of small business and non-profit grants, the review process is taking longer than originally anticipated.  The state will still be reviewing applications and performing financial verifications to determine final award amounts into January 2021, and payments will continue to be distributed in the new year.

December 29, 2020

Changes Announced and Deadline Extended for South Dakota Small Business and Non-Profit Grants

This morning, Governor Noem announced changes to the Small Business Grants which utilize Coronavirus Relief Fund dollars to assist small businesses and start-up businesses, and small non-profit businesses. The updates will help even more businesses and include:

  • Increasing the maximum grant from $100,000 to $500,000
  • Decreasing the minimum threshold from $750 to $500
  • Broadening the eligibility requirement from reduction in business of more than 25% to a reduction in business of more than 15%

Additionally, the application deadline will be extended by one week, so the new deadline for applications will be October 30. 

For eligibility, bill details and application information click the link to our original Grant blog at https://www.ktllp.cpa/additional-grants-available-for-south-dakota-small-businesses-affected-by-covid-19/

October 22, 2020

Additional Grants Available for South Dakota Small Businesses Affected by COVID-19

The South Dakota State Legislature met yesterday in a special session and increased the state’s budget to include the $1.396 billion of additional federal aid received for COVID-19 support.  During this session, Resolution 601 was passed which specifies how certain funds will be spent.  This is good news for many small businesses in South Dakota, as $400,000,000 of the relief funds are available to be issued as grants to small businesses.   You can find the bill here:

https://sdlegislature.gov/Legislative_Session/Bills/Bill.aspx?File=SCR601ENR.html&Session=2020s&Version=Enrolled&Bill=SCR601

In order to be eligible to apply for a grant, businesses must meet the following requirements:

  • Be located in South Dakota
  • Have had a reduction in business of at least 25% (defined below)
  • Not have gross revenues exceeding $38.5 million
  • Certify to a going concern statement

The requirement for a 25% reduction in business is calculated by comparing net cash flows from operations during March through August of 2019 to those from March through August of 2020.  Cash flow is defined as cash revenues minus cash expenses, less payments on term debt.  The calculation does not include depreciation, amortization, or other noncash expenses.  Also, federal aid such as PPP funds or other COVID related grants received in 2020 must be included as revenues in the calculation.

Grants will be available up $100,000 per qualifying business and may not be awarded if calculated at less than $750.  The application period is expected to open on October 12, 2020 and close on October 23, 2020.  This gives businesses just 12 days to submit their applications.  Once the application window closes, grants will be awarded based on a pro-rata share of the available funds.  The grants are required to be disbursed by December 30, 2020.

Resolution 601 also includes $40,000,000 of grants earmarked for small nonprofit businesses, $10,000,000 for small business start-ups, and $115,000,000 for community-based health care providers. A small business start-up is one that first registered with the State of SD between September 1, 2019 and June 1, 2020.  A health care provider must show a reduction in net cash flows, but there is no 25% threshold.

We expect the grant applications to be available in the next few days at:   https://covid.sd.gov/

The knowledgeable staff at Ketel Thorstenson, LLP is here to help you with the calculations required and can assist you with submitting your application for COVID-19 related grant funds.  Please contact us today at 605-342-5630.

October 6, 2020

Tax Planning with RMDs, QCDs, and CVDs

RMDs

Recent tax law waived required minimum distributions (RMDs) from IRAs and other qualified plans for 2020.  This is an advantage for taxpayers who do not need the funds as the money can continue to grow tax deferred.  If you decide to forgo your RMD for 2020 and typically have federal income tax withheld from your RMD to cover your tax liability, you may need to consider other options in order to avoid an estimated tax penalty.  Other options for timely submitting your federal income tax to the IRS include paying quarterly estimated taxes, increasing withholding from wages if still working, or increasing withholding from Social Security or pension payments if not working.

QCDs

One question that has arisen with the waiver of RMDs for 2020, is whether or not qualified charitable distributions (QCDs) are still allowed for 2020.  Good news – the answer is yes!  As a reminder, QCDs are direct transfers of funds from IRAs to qualified charities.  The IRA distributions are not taxable and no charitable write-offs can be claimed.  Taxpayers must be age 70 ½ to be eligible and are limited to $100K annually per person.  Even though RMDs are suspended for 2020, QCDs remain a valuable tax savings tool for 2020.  Benefits of QCDs include:

  • Double dipping – You get the benefit of taking the standard deduction while also canceling out the income from the IRA distributions.  This is especially beneficial with the doubling of the standard deduction by the Tax Cuts and Jobs Act, as many taxpayers are no longer able to itemize.
  • Savings on Medicare premiums – Medicare premiums are calculated based on your adjusted gross income (AGI), and since QCDs are not included in your AGI, they can help to keep the cost of your Medicare premiums down.
  • Reducing tax on Social Security benefits – Your AGI is a factor in determining the taxability of your Social Security benefits, and since QCDs do not add to your AGI, they can help keep the taxable portion of your Social Security benefits down.
  • Eliminating the net investment income tax (NIIT) – The NIIT is a 3.8% tax on investment income which applies to taxpayers with modified AGI greater than $200K for single taxpayers and $250K for joint filers.  Utilizing a QCD may keep your modified AGI below these thresholds and thus eliminate any NIIT.
  • Reducing future RMD amounts QCDs reduce the balance in your IRA which is used to calculate future RMD amounts.

CVDs

In addition, the CARES Act created a unique opportunity for taxpayers to borrow funds from their IRAs tax-free during 2020.  Taxpayers qualifying for the coronavirus related distributions (CVDs) can withdraw up to $100K from their IRAs and have up to three years to re-contribute the distributions and avoid income tax.  Furthermore, the 10% early withdrawal penalty for taxpayers under age 59 ½ does not apply to CVDs — even if not re-contributed over the three years.  In order to qualify for a CVD, you must meet one of the following tests:

  • You are diagnosed with Covid-19
  • Your spouse or dependent is diagnosed with Covid-19
  • You experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or forced to reduce work hours due to Covid-19
  • You are unable to work because of a lack of childcare due to Covid-19 and experience adverse financial consequences as a result
  • You own or operate a business that has closed or had operating hours reduced due to Covid-19 and have experienced adverse financial consequences as a result
  • You have experienced adverse financial consequences due to other Covid-19 related factors to be specified in future IRS guidance

Utilizing CVDs may benefit taxpayers by providing much needed cash now.  CVDs can be withdrawn from one or several IRAs and the funds don’t have to be put back into the same IRA from which they were withdrawn.  The three year window for repaying each CVD begins the day after withdrawal.  If you choose not to contribute the funds back into your IRA, you have the option to pay the tax entirely in 2020, or you can report the income over three years.  Consult your Ketel Thorstenson, LLP tax advisor to discuss your specific tax situation. 

September 25, 2020

Good News for Social Security Recipients Who Have Not Filed Tax Returns for 2018 or 2019

The IRS has announced that individuals who receive Social Security or Railroad Retirement benefits who have not been required to file tax returns do not need to do anything to receive the $1,200 Economic Impact Payment.  The IRS will use direct deposit information available from Social Security to deposit the payments.  If no direct deposit information is available, the payment will be mailed.  The payments are expected to begin in the next three weeks.  Additional information regarding the Economic Impact Payments is available at https://www.irs.gov/coronavirus/get-my-payment .

April 3, 2020

Tax Tip: Changes to Traditional IRA Rules

The Secure Act, which went into effect January 1, 2020, changed the rules on traditional IRA contributions and required minimum distributions (RMDs).  The old rules disallowed traditional IRA contributions once you reached age 70 ½.  The new rules allow traditional IRA contributions to be made at any age (as long as you have earned income).  Additionally, the old rules required you to start taking RMDs once reaching age 70 ½.  The new rules allow you to wait until age 72.

Consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own.  Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and Tax Reform affects or questions.

March 10, 2020