Virtual Currency & Taxation: Part 3 Working with clients & the future of bitcoin (virtual) taxes
Amy Wall Author of Virtual Tax: The taxation of virtual currency
INSTRUCTOR
Amy Wall Tucson Tax Team Amy M. Wall, EA, MBA, is part tax, money, and science geek. She graduated from Harvey Mudd College with a double major in Chemistry and Economics, and later earned her MBA. After building bombs for the defense industry for many years, she moved into the financial world and now has a private tax practice in Tucson. Her economics background led her to virtual currency, and now asks the million-dollar question: How will virtual currency be taxed?
Course Overview ● Working with Virtual Currency Clients ● The Future of IRS Regulations
Working with Virtual Currency Clients
Poll Question
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients Concerns: ● Poor recordkeeping ● Inadequacy of software translating CSV into 8949 ● Volume of transactions ● Vagueness of IRS guidance
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients Typically four types of virtual currency clients: ● Investors – comfortable with risks if large rewards are possible. ● IT folks – fascinated by the technology, likely to be actual miners. ● Dabblers – sticking their toes in the water. ● Other – interested in disruptive technologies…and other…
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency Clients
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency Clients
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency Clients
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency Clients
Poll Question
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients: Bookkeeping Integrating a USD P&L with virtual currency spreadsheets Always ask questions! ● You sold virtual currency to buy equipment—did you already own that virtual currency or was it purchased at that moment in order to buy the equipment? ● Does income recorded on the P&L include the income from virtual currency sales? ● Is the virtual currency listed as an asset in the balance sheet? ● Etc., etc., etc.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients: LLC? FAQ: Is there any tax benefit to owning investment virtual currency as an LLC? No. It’s just another attempt to come up with some clever way to avoid taxation.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: De Minimis
“
Individuals all over the world are starting to use cryptocurrencies for small every day transactions, yet here in the States we have fallen behind and make cryptocurrency use more of a challenge than it needs to be. With this simple legislative change, anyone can make digital payments to buy a newspaper or a bike without worrying about tax code challenges.” - Representative Schweikert
Sept. 2017: Two Representatives introduced the Crypto Currency Tax Fairness Act, which would provide tax relief for cryptocurrency gains of less than $600. The idea is that this would free users from having to track minor transactions.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Working with Virtual Currency Clients Virtual currency tax law is in its infancy. You want to make sure your clients understand that you are not responsible for the effects of tax code changes on their tax returns.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Best Practices for Virtual Currency Users Stop now, and try to find the basis of what you currently own. Then move forward. 1. Don’t do anything you can’t document. 2. Stay with exchanges supported by Bitcoin.tax or similar software. 3. Print out statements regularly. Otherwise, if your exchange shuts down, you’ll have proof of NOTHING. 4. Don’t rely on like-kind exchanges; pay your tax as you make the sale or trade. 5. Stay in touch with your tax advisor.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Best Practices for Virtual Currency Tax Preparers 1. Specifically ask your clients if they have any dealings with virtual currency. 2. Make sure your client understands the impact of engaging in the virtual currency market. 3. Have the client list all virtual currency income sources in writing. 4. Let the client be responsible for providing correct 8949 information. 5. Have the client obtain documentation showing the value of inherited virtual currency.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Best Practices for Virtual Currency Tax Preparers 6. Take virtual currency losses on Schedule A, subject to the 10% and $100 restriction. 7. If your client had ≥$10K in a foreign exchange at any point during the year, file an FBAR. 8. Report trades as a sale and subsequent purchase, just as if a client had sold Coca-Cola stock and purchased Amazon. 9. Don’t take risks for the client; tax fraud is a bigger problem than having your clients pay tax on their virtual currency income. 10. Use a questionnaire and an engagement letter for virtual currency clients.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Add this to your basic questionnaire In the past calendar year, have you had any dealings with virtual currency such as, but not limited to, Bitcoin, Ethereum, Litecoin, Dash, etc.?
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Add this to your basic questionnaire ❏ I have earned virtual currency through mining or by working for others. ❏ I have sold or traded virtual currency. ❏ I have lost virtual currency in some manner. ❏ I have given virtual currency to someone else. ❏ I have inherited virtual currency. ❏ I am holding virtual currency in a foreign exchange.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Questions?
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
Virtual Currency Engagement Letter Make these points: Tax laws that apply to virtual currency are in their infancy and are subject to change and/or reinterpretation by the IRS or by tax courts. The client understands that [TAXES R US] will prepare his/her tax return using information that was provided by the client and under virtual currency tax law as it is now understood. [TAXES R US] is not responsible for the taxes, penalties or interest that may result from withheld information or for change/reinterpretation of virtual currency tax laws.
Poll Question
Future of IRS Regulations
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations IRS has been taken to task repeatedly for its failure to issue guidelines:
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: John Doe Nov 2016: IRS was granted the right to issue a John Doe summons to Coinbase, the largest Bitcoin exchange in the US. The summons asks for the records of all purchases made from 2013 to 2015. Coinbase refused. After much legal dickering, the IRS narrowed the request to Coinbase users with at least $20K in any one type of transaction (buying, selling, sending or receiving).
The IRS knows there is a problem but does not have the resources to solve it.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games – Defining Terms ● MMORPG: Massively Multiplayer Online Roleplaying Games ● Closed-flow systems: there is no economic link between the virtual world and the real world. ● Open-flow systems: economic channels are open; real assets may be used to purchase virtual assets and virtual assets may be sold for real assets. ● Hybrid systems: one or more economic channel is closed. Should these transactions be taxed?
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games – Taxation Vocational gamers on the IRS radar: playing for the game companies or entering tournaments. ● Lee Flash earns half a million dollars a year playing StarCraft. ● Xie Junhao earns half a million dollars a year playing DOTA2. ● Kurtis Ling took home one million dollars at a DOTA2 tournament. ● Team Newbie, with five players, took home over a million dollars at a DOTA2 tournament. Vocational gamers not on the IRS radar: ● People who quietly create and sell high-level characters for dollars.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games – Taxation Taxation of MMORPGs (Massively Multiplayer Online Roleplaying Games) was a main concern of the 2013 GAO Report: ● What are the tax issues?
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: The Taxation of Online Gaming Closed flow systems: there is no economic link between the virtual world and the real world.
Virtual Currency
Fiat Currency
“Real” goods and services
Virtual goods and services
Virtual currency can be used to purchase virtual goods or services only. There is no interaction between the virtual currency and fiat currency or “real” goods and services.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: The Taxation of Online Gaming Open flow systems: economic channels are open; real assets may be used to purchase virtual assets and virtual assets may be sold for real assets. Virtual Currency
Fiat Currency
“Real” goods and services
Virtual goods and services
Virtual currency can be used to purchase both “real” and virtual goods. It is freely exchangeable with fiat currency.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: The Taxation of Online Gaming Hybrid systems: one or more economic channel is closed
Virtual Currency
Fiat Currency
“Real” goods and services
Virtual goods and services
Virtual currency can be used to purchase virtual goods and services and may be used to purchase “real” goods and services. In some hybrid systems, virtual currency may be purchased with fiat currency.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games – Defining Terms General agreement is that closed-flow and hybrid game economies do not create taxable income. The disagreement comes about when discussing open-flow economies. ● If I sell virtual gold for real dollars, do I have a taxable transaction? ● If I sell a virtual suit of armor for virtual gold, do I have a taxable transaction? Lawyers are fighting this out right now!
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games World of Warcraft, the most popular MMORPG on the planet, attempts to function as a closed-flow system through its Terms of Use. Its popularity has created a secondary market completely outside the control of the game’s founders. 2007: A World of Warcraft player sold his account (which included formidable weaponry for game use) for $9,500. What was his basis??
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games Open Flow Systems: Second Life, another hugely popular MMORPG, deliberately created an open-flow system that utilizes the LindeX exchange, allowing players to freely exchange Linden dollars for fiat currency and vice versa. A player can spend fiat currency to create virtual assets in Second Life – buildings, businesses, etc. – and then sell these virtual assets for virtual currency which can then be directly converted to fiat currency. Clearly there is a possibility of a taxable event.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games Hybrid Systems: Diablo III had a hybrid economy in which an in-game auction was available for players to sell virtual assets for fiat currency. The game company took a fee for each transaction. The auction was shut down in 2014 because the game company felt the ability to purchase virtual assets reduced excitement in the game itself, but other games have adopted the auction idea.
Virtual Currency and Taxation Part III Amy Wall, Tucson Tax Team
The Future of IRS Regulations: Online Games ● What’s next? ● More IRS guidance? ● IRS unraveling the blockchain to find investors? ● Spectacular court cases to frighten virtual currency users? What we do know… the IRS has very limited resources.
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Amy Wall
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Virtual Currency & Taxation - Part 3 Working with Bitcoin and Other Virtual Currency Clients & the Future of IRS Regulations
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Amy Wall
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