Monthly Archives: June 2015

How Will the IRS and the States Handle Virtual Currency?

by Cody Taylor

bitcoinOver the last decade the Internal Revenue Service (IRS) has been faced with a brand new subject courtesy of our interconnected world: virtual currency.  Bitcoin is the most well-known but there are over 150 virtual currencies worldwide with some of the other larger ones being Litecoin, Darkcoin and Peercoin.  As these currencies have popped up and have become more popular the IRS needed to decide how to handle transactions conducted in these new currencies.  Bitcoin for instance is accepted at mainstream retailers such as Overstock.com, Dish Network and Expedia, among others.

The IRS issued guidance in the form of answers to Frequently Asked Questions (FAQs).  This setup tries to provide an overview for how transactions in virtual currencies will be handled for federal tax purposes.  What follows is an excerpt of the FAQs from IRS Notice 2014-21:

Q-1: How is virtual currency treated for federal tax purposes?

A-1: For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.

Q-2: Is virtual currency treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws?

A-2: No. Under currently applicable law, virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.

Q-3: Must a taxpayer who receives virtual currency as payment for goods or services include in computing gross income the fair market value of the virtual currency?

A-3: Yes. A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, 3 measured in U.S. dollars, as of the date that the virtual currency was received. See Publication 525, Taxable and Nontaxable Income, for more information on miscellaneous income from exchanges involving property or services.

Q-4: What is the basis of virtual currency received as payment for goods or services in Q&A-3?

A-4: The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services.

Q-5: How is the fair market value of virtual currency determined?

A-5: For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.

The rest of IRS Notice 2014-21 and the remaining FAQs can be found at IRS Notice 2014-21 – Federal Taxation for Virtual Currencies.  At the state level the details of how virtual currency will be handled is still being worked out.  North Carolina currently has a bill in the state congress that addresses how the state wants to handle a number of issues associated with virtual currencies.  They even have a Virtual Currency Corner on the North Carolina Commissioner of Banks website dedicated to current virtual currency news and legislation.

If you have any dealings with virtual currency or might in the future, we would be happy to help answer any questions you may have.  Please contact our office for additional information.

Cody ([email protected]) is part of our tax staff at Langdon & Company LLP.  He focuses on high-net wealth individuals, and other various types of tax projects.

Time Management

by Brittany Spragins

As a working mother, I set out on a quest to find a better method of time management.  Trying to balance cooking, cleaning, child rearing, work, time with my husband, and some alone time has proven difficult; especially when the nagging voice in the back of my head tells me to keep pushing for career advancement.  I was about to resign myself to the thought that I would have to choose one, either wife and mother, or a career woman, when I stumbled across a book by Laura Vanderkam entitled “I Know How She Does It.”

This book looks at the lives of 143 women who make at least $100,000 a year and have at least 1 child under the age of 18 living at home.  The biggest secret for them is their ability to manage time.  Ms. Vanderkam explains that when you look at life a week at a time, rather than day by day, you can plan better.  For example, most women want the same routine every day, but cannot make time for working out 7 days a week.  What about having the same weekly routine where you work out 4 days a week, but different times of the day depending on the schedule of other activities?  To enable you to mentally change and accept this life changing structure, she recommends keeping a time log.  On it, you have your week broken down into 168 hours and you record your time in 30 minute increments.  After a week or two of collecting data, look at your time log and decide if this is how you would like to spend your time.  Prioritize the time with the essentials and then plan around that accordingly. She recommends looking for areas that you can combine, like working out and watching TV, or engaging in “functional fitness” where you exercise in your everyday activities like taking a brisk walk to your business meeting instead of driving to it.

As you start to learn your tendencies and consolidate overlapping activities, you can plan a week that will enable you to maximize your time with family, be more productive at work, and still enjoy some time for yourself.  Once you have a handle on your average week, start dreaming big to see where you can go with all of your extra time.

Think this sounds interesting?  Call Langdon & Company LLP today for additional perspective on how to better manage your time and other planning suggestions.  Check out more at Laura Vanderkam’s website http://lauravanderkam.com/.

Brittany ([email protected]) is an staff accountant serving in both our tax and audit departments.  She focuses on a variety of specific projects that are beneficial to the firm.

Opportunities for Tax Savings Using a Section 1031 Exchange

by Morgan Norris

What is a Section 1031 exchange? exchange-money

An exchange using Section 1031 of the Internal Revenue Code occurs when you sell an investment property and subsequently purchase another similar property within a certain amount of time.  This exchange is also known as a “like-kind” exchange, and can be used to postpone paying tax on the gain from the property sale if all the IRC requirements surrounding the exchange are met.  A Section 1031 exchange is reported on Form 8824, Like-Kind Exchanges.

Who qualifies?

Owners of investment and business property; including individuals, C corporations, S corporations, Partnerships, LLC’s and trusts can all qualify to take part in the Section 1031 exchange.

What are the requirements?

There must be an exchange of properties.  Examples of property exchanges include:  a simultaneous swap of one property for another or a deferred property exchange.  A deferred exchange allows you to dispose of a property, and then identify and purchase another property within a certain window of time.  Two time limits must be met in order to avoid a taxable event during a deferred exchange.  The first time limit requires you to identify potential replacement properties within 45 days from the date of the original property sale.  Your identification of the potential property must be in writing and must follow certain additional rules in order to be valid.  The second time limit requires that the replacement property be received and the exchange completed no later than 180 days subsequent to the sale of the original property or the extended due date of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier.  The replacement property must be substantially the same as the property identified in the original paperwork issued.  There is no limit on how many times, or how frequently you can participate in a Section 1031 exchange.

Ways in which taxable gain may result

The exchange can include like-kind property exclusively, or a combination of like-kind property and cash, liabilities and/or non-like-kind property.  Exchanges consisting of cash, debt relief or non-like-kind property may trigger some taxable gain in the year of the exchange.  Taxable gain may also be generated from taking possession of cash from the sale of the relinquished property.  A Section 1031 exchange requires that a third party, such as a qualified intermediary, hold the proceeds from the original sale until the full exchange is complete.  Your real estate agent, broker, accountant or attorney may not act as your qualified intermediary.  Additional stipulations are also placed on the qualified intermediary.

Depreciation recapture may also be the result of certain exchanges.  This is taxed as ordinary income, and is usually the result of swapping items that are not necessarily of like-kind, such as improved land with a building for unimproved land without a building.

The fine print

A properly constructed Section 1031 exchange allows one to defer; but not forgive, taxable gain.  It is pertinent that the basis in each additional property purchased be tracked until the last replacement property is eventually sold.  Once this occurs, taxable gain will be calculated using the basis schedule.

Morgan ([email protected]) is a tax senior at Langdon & Company LLP.  She has experience with individual and corporate tax preparation.  Please contact our office if we can provide additional information.

Are YOU a Victim of Tax Identity Theft?

by Susan Dean

If you have received a 5071C letter from the Internal Revenue Service (IRS), you may indeed be a victim of tax identity theft. The purpose of the 5071C letter is to inform you that the IRS has received a tax return with your name and/or social security number and need to verify your identity. In an effort to protect the taxpayer, the letter provides two options to contact the IRS and confirm whether or not you filed your return. Taxpayers may use the idverify.irs.gov site or call a toll-free number on the letter. Due to the high-volume of calls, the IRS-sponsored website is the safest, fastest option for taxpayers with web access.

Below is a Taxpayer Guide to Identity Theft posted by the IRS.

ID theftWhat is tax-related identity theft?

Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund.

Generally, an identity thief will use your SSN to file a false return early in the year. You may be unaware you are a victim until you try to file your taxes and learn one already has been filed using your SSN.

Know the warning signs

Be alert to possible identity theft if you receive an IRS notice or letter that states that:

  • More than one tax return was filed using your SSN;
  • You owe additional tax, refund offset or have had collection actions taken against you for a year you did not file a tax return;
  • IRS records indicate you received wages from an employer unknown to you.

Steps to take if you become a victim

  • File a report with law enforcement.
  • Report identity theft at gov/complaint and learn how to respond to it at identitytheft.gov.
  • Contact one of the three major credit bureaus to place a ‘fraud alert’ on your credit records:
  • Contact your financial institutions, and close any accounts opened without your permission or tampered with.
  • Check your Social Security Administration earnings statement annually. You can create an account online at ssa.gov.

If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, take these additional steps:

  • Respond immediately to any IRS notice; call the number provided
  • Complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print, then mail or fax according to instructions.
  • Continue to pay your taxes and file your tax return, even if you must do so by paper.

If you previously contacted the IRS and did not have a resolution, contact the Identity Protection Specialized Unit at 1-800-908-4490. We have teams available to assist.

How to reduce your risk

  • Don’t routinely carry your Social Security card or any document with your SSN on it.
  • Don’t give a business your SSN just because they ask – only when absolutely necessary.
  • Protect your personal financial information at home and on your computer.
  • Check your credit report annually.
  • Check your Social Security Administration earnings statement annually.
  • Protect your personal computers by using firewalls, anti-spam/virus software, update security patches and change passwords for Internet accounts.
  • Don’t give personal information over the phone, through the mail or the Internet unless you have either initiated the contact or are sure you know who is asking.

The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

Report suspicious online or emailed phishing scams to:[email protected] For phishing scams by phone, fax or mail, call: 1-800-366-4484. Report IRS impersonation scams to the Treasury Inspector General for Tax Administration’s IRS Impersonation Scams Reporting.

This excerpt and additional Q&A information on Identity Theft can be found on the IRS website.