TaxFacts Intelligence August 9, 2021
Posted by William Byrnes on August 9, 2021
Did Your Clients Properly Report Their Pre-Tax Reform Cryptocurrency Trading Gains? Seven years after the IRS declared cryptocurrency would be taxed as personal property under capital gains rules, it has now announced that pre-tax reform trades won’t qualify for like-kind exchange treatment under Section 1031, creating a potential tax headache for taxpayers with substantial pre-reform crypto gains. Meanwhile, challenges to the IRS’s ability to impose substantial FBAR penalties for failure to report foreign accounts continue to flare up in federal courts despite a clear consensus in both Texas and the 9th Circuit. Read on to make sure you’re up to speed.
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New IRS Guidance Nixes Tax-Free Exchange Treatment for Cryptocurrency Swaps. New IRS guidance has confirmed that pre-2018 exchanges of Bitcoin, Ether and Litecoin do not qualify for Section 1031 exchange treatment. Prior to 2018, taxpayers were permitted to defer capital gains taxes under Section 1031 for certain exchanges of personal property (1031 is now limited only to exchanges of real property). The IRS’s rationale is that these were not exchanges of like-kind property and so were taxable even prior to tax reform. The IRS found that Bitcoin and Ether each had special roles in cryptocurrency trading because if taxpayers wanted to trade in other types of virtual currency, they had to first exchange the other currency into or from Bitcoin or Ether. Therefore, exchanges between Litecoin and Bitcoin/Ether did not qualify as “like kind”. Further, the IRS identified differences in design, intended use and actual use of Bitcoin and Ether. While this guidance currently only extends to exchanges involving Bitcoin, Ether and Litecoin, it is possible that the IRS could extend the rationale to other types of cryptocurrency. Taxpayers who trade in cryptocurrency under current tax rules should remember that these trades are taxable events. For more information, visit Tax Facts Online. Read More
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New Challenge Posed to Federal Courts’ $10,000 Per-Year Limit on FBAR Penalties. Several recent federal court decisions have confirmed that the total FBAR penalties that can be imposed on an individual should be limited to $10,000 per year, rather than $10,000 per financial account. Now, a federal court in Georgia is once again hearing a similar case. In 2018, the IRS assessed $120,000 in penalties for a three-year period for each of the foreign banks with which the taxpayer had a relationship that she failed to report via FBAR filing. Federal courts in both Texas and California have confirmed that the IRS must limit penalties for a non-willful failure to file FBAR reports based on the year, not the number of the taxpayer’s foreign accounts. In the current case, the taxpayer had also participated in an amnesty program where she paid back taxes on the accounts she held with banks in France, Lebanon and Monaco. For more information on the FBAR filing requirements and penalties for noncompliance, visit Tax Facts Online. Read More
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IRS Extends Relief for Employee Donations of Unused Sick, Vacation & PTO. The IRS has extended the relief provided in Notice 2020-46 to allow employees to continue to forgo, or “donate”, sick, vacation and personal leave because of the COVID-19 pandemic without adverse tax consequences through the end of the 2021 tax year. After December 31, 2020 and before January 1, 2022, employers may make cash payments to Section 170(c) charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave which their employees gave up. Those amounts will not be treated as compensation and the employees will not be treated as receiving the value of the leave as income. While taxable income will not be increased, employees cannot claim a charitable deduction for the leave donated to their employer. Employers, however, may deduct these cash payments as Section 162 business expenses or Section 170 charitable contributions if the employer otherwise meets the respective requirements of either section. For more information on the deduction for charitable contributions, visit Tax Facts Online. Read More
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