Taxes

Why You Should File Cryptocurrency Tax

April 5, 2021 By Melissa Batai Leave a Comment

Cryptocurrency had a banner year in 2020. Bitcoin, in particular, increased significantly in value in 2020. While cryptocurrency used to be a fringe currency, it is becoming more mainstream and there are many types available. As such, the IRS has caught up. Over the last few years, the agency has been more stringent about receiving their fair share. There are several reasons why you should file for cryptocurrency tax.

The IRS Is Becoming Increasingly Insistent

Back in 2019, the IRS sent several thousand letters to those who held cryptocurrency to remind them that they were under legal obligation to pay taxes on the money they make from cryptocurrency and on the income they earn in cryptocurrency. At that time, the IRS stated in a press release, “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

Now, on the 2020 tax form, on page one, just below where you fill in your vital information, you will find a yes or no question: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” As this statement is front and center on the form, lying about it and saying you didn’t see it is no longer credible.

You Are Legally Obligated

Just as you are legally obligated to report income earned during a tax year as well as capital gains received, you are legally obligated to report income paid via cryptocurrency and gains realized from selling cryptocurrency.

But, that also means you can report losses on cryptocurrency if you sell at a loss. You will need to use IRS Form 8949 to report your loss. However, you must sell before you report this loss. If you simply continue to hold the cryptocurrency, but it has lost value, you cannot report it.

Having said that, you are expected to keep track of and report gains, losses, and income yourself. You may receive a 1099-K if you had more than 200 transactions or $20,000 in gross proceeds. Anything less than that, and you will not receive a 1099-K. However, just because you didn’t receive a form doesn’t mean you don’t have to report any transactions.

Cryptocurrency Doesn’t Always Appear on Your Taxes

Why File for Cryptocurrency Tax — Photo by Kelly Sikkema on Unsplash

You can mark that yes, you did have a financial interest in any virtual currency and still not have a taxable event. That happens if you have cryptocurrency but did nothing with it this year; you just held it.

Final Thoughts

One of the main reasons why you should file for cryptocurrency tax is because the IRS has made a question about cryptocurrency front and center on the tax form. In addition, you don’t want to risk legal repercussions for hiding the money you may have been paid or earned through cryptocurrency.

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Weekly Wrap: Vaccine Passport Coming As Scams, Car Prices, IPOs All Trend Up

April 3, 2021 By Max Erkiletian Leave a Comment

One old dirty trick is still with us. However, other financial matters are changing quickly. Check out this week’s financial wrap.

Tax and Social Security Scammers Add to Their Bag of Tricks

The phone rings. Caller ID shows a Washington, D.C. number. You answer and an official-sounding recording says you are in trouble with the Internal Revenue Service (IRS). Or, your social security number has been used in criminal activity. You need to respond quickly.

You are on your way to losing money to a scam artist if you obey the instructions.

“Consumers reported losing more than $3.3 billion to fraud in 2020, up from $1.8 billion in 2019,” states a report from the Federal Trade Commission. “Nearly $1.2 billion of losses reported last year were due to imposter scams, while online shopping accounted for about $246 million in reported losses from consumers.”

Expanding Fraud Opportunities

The IRS and social security scams have been around for years. But now the same techniques are being used to take advantage of fraud related to COVID-19.

The crimes include stealing unemployment benefits, stimulus checks, fake COVID treatments, and bogus charities.

Formula for Fraud

The tried and true template for all these frauds is the IRS phone fraud. Although it can and has been carried out with texts and emails.

With IRS phone fraud, you get a call like the one detailed above. Fear is a big part of the scheme’s success.

The call seems official because it comes from a Washington, D. C. number. However, scammers spoof calls. That is where false information is used to make the call appear to come from a legitimate source. Some phone providers even offer spoofing services that work like prepaid calling cards.

The Call Is Not From the Government

“Government agencies like the Internal Revenue Service (IRS) or the Social Security Administration (SSA) won’t call, text, or email you out of the blue to demand payment right away,” writes FTC Attorney Emily Wu in an agency blog post.

The IRS Confirms Wu’s Assertion

“The IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information,” the service says.

To help consumers, the IRS has posted a list of current scams.

To report a scam call, email or text, contact the FTC.

Here is how the FTC suggests you handle a government imposter call.

Here’s Why Your Next Car (New or Used) Will Cost More

You may have heard semiconductor chips are in short supply. The chip drought will short circuit any ideas you had about getting a bargain on your next car.

Semiconductors make up around forty percent of the cost of a new car, according to consulting firm Deloitte. Without them, modern automobiles can not function properly. Auto manufacturers around the world have slowed production as a result of the shortage. That means fewer new cars are coming to market.

Check out Saving Advice’s look into the semiconductor shortage and the impact it will have on your wallet. Our special cover will be available in Sunday’s edition.

IPOs Continue To Boom, SPACs Bust As Opportunity Opens for Small Investors

The surge in IPOs that began last year has charged into 2021 and is rising. Meanwhile, small investors are able to join the stampede.

Companies raised $174 billion on 494 offerings in 2020, according to FactSet, a financial data and software company.

“In aggregate, IPOs raised $174 billion in 2020, a 150% increase over 2019,” according to FactSet.

The number of companies raising over $1 billion set a record at 28. DoorDash and Airbnb both exceeding $3 billion.

IPO Market Off to a Strong Start in 2021

This year is shaping up as an IPO tsunami. Through mid-March, 302 IPOs have raised 102.3 billion, according to Dealogic.

SPACs Go Splat

The only sour note is the recent downturn in Special Purpose Acquisition Companies (SPAC).

SPACs are often called “blank check” companies. They are shell companies. These companies raise money through a stock offering to invest in other companies.

SPACs joined in the IPO surge last year. They now have an estimated $1 trillion in buying power, according to Business Insider. However, average SPAC returns are minus 34 percent between January 2019 and June 2020. Many are trading below their IPO price. Consequently, the market seems to be cooling.

Democratization

IPOs have long been reserved for wealthy and institutional investors. However, SoFi is trying to change that. The investment company is offering IPOs to clients with $3,000 or more in their account. Robinhood is planning to do something similar.

Vaccine Passports Are Coming

Soon, you may be asked to show your passport when you attend public events. No, not that passport. The one showing you have been vaccinated against COVID-19.

The Biden Administration is considering “vaccine passports”. These credentials would be displayed on free smartphone apps or printed.

The White House, various tech companies, local governments, and universities in the United States are trying to develop a credentials plan.

Global Effort

Internationally, the World Health Organization (WHO) is exploring vaccination passport ideas.

Several airlines are testing a digital travel pass developed by the International Air Transportation Association.

The European Commission is contemplating a “digital green certificate”. The voucher would be for travel within the European Union. It would be proof of vaccination, a negative COVID test, or a previous infection.

Everybody Has a Plan

Countries and organizations are researching or have announced plans to implement vaccination passports.

Israel is developing a “green pass” to travel. In Demark, a “Coronapas” will be required to enter hair salons, movie theaters, and restaurants, according to the BBC. Meanwhile, Sweden, Estonia, and Greece are also considering issuing vaccine passports.

Standardization

The potential for chaos is great.

The Federal Health IT Coordinating Council cited the need for one coordinated plan to avoid confusion.

The council stressed that “A chaotic and ineffective vaccine credential approach could hamper our pandemic response,” The Washington Post reported.

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Last Minute Ways to Reduce Your Taxes

April 1, 2021 By Kathryn Vercillo Leave a Comment

It’s almost April 15th, which normally means that your taxes are just about due. However, the federal government gave everyone an extension this year. You don’t have to file your taxes until May 17, 2021. Nevertheless, it’s one of those things that might just be better to get out of the way. Before you do, make sure you know about the ways to reduce your taxes.

Obviously, you’ll be filing your taxes for 2020. Therefore, most of the things that you could do to reduce what you owe had to be completed by now. However, there are a few things that you can do in the year that you file to still reduce what you owe.

4 Ways to Reduce Your Taxes in 2021

Yes, even though you’re filing your 2020 annual taxes, there are things you can do before May 17, 2021 to help save you money. If you are smart, you won’t file your taxes before checking out these options.

1. Max Out Your IRA Contribution

Your IRA is good for your taxes. The more you contribute to your IRA, the better your tax refund may be. If you haven’t maxed out your 2020 contribution to your IRA, then there is still time to do so. Unlike your 401(k) and otther savings and investments plans, you don’t have to complete your contributions at the end of the year to count it toward taxes. You have until May 17, 2021 to contribute to offset last year’s taxes.

As long as you have the money, even in a regular savings account, it makes sense to make this contribution. It will immediately reduce your taxes, allowing you to get a bigger refund. Heck, you can use the refund to replace the savings that you used to contribute to the IRA. Moreover, you’re setting yourself up for retirement success by socking away as much money as possible in that account. It’s a win-win situation.

If you have a 401(k) plan through your work, then you’re limited in your IRA contributions. However, depending on what you earn, you may still benefit from IRA deductions. The exact amount you’re allowed varies depending on your income, so check on that before you make your IRA investment. On the other hand, if you don’t have a 401(k) through work, then you aren’t limited in this way. You can contribute up to $6000 to your IRA. If you’re over age 50, you can add another $1000 to that. All of this goes towards improving your tax refund.

Important note: If you earned very little money this year, then you might not be allowed to contribute the full $6000. You’ll get taxed on any excess over what’s allowed. Therefore, you want to look at this all very carefully. That said, if you don’t make any other tax move before you file, this is the one to make.

Get all of your tax questions answered with H&R Block’s Tax Information Center!

2. Invest in Qualified Opportunity Zones

If you received capital gains from your investments in 2021, then you might want to offset those gains. One really smart way to do that, and one you can still do before you file your taxes, is to invest in Qualified Opportunity Zones. Specifically, you can sell an existing property, then reinvest that money into one of those Qualified Opportunity Zones. If you do, you can defer the tax on the sale. All of this is relatively new, thanks to the 2017 Tax Cuts and Jobs Act. However, after getting off to a slow start, experts say that Opportunity Zones could be poised for a big investment opportunity this year.

3. Take Advantage of Being a Small Business Owner

If you are filing as a small business owner, there are still some things you can do to lower your taxes before you file. That same Tax Cuts and Jobs Act that helps defer taxes on real estate investments as described above also includes a 20% business deduction for business owners who earned less than $315,000.

The act also has new flexible rules about depreciation deductions, which means you might be able to increase your depreciation claims now to reduce your income below that $315,000 threshold so that you can take advantage of the 20% business deduction.

Small businesses were hugely affected by COVID-19 restrictions. Therefore, there’s a good chance that you had some struggles that might make it so that you qualify for these deductions. Don’t miss out on them.

Furthermore, as a small business owner (or even a self-employed individual), you might benefit from changing how you do your business accounting. CNBC’s Andrew Osterland explains that you have two options:

Accrual basis, which is recognizing income as you earn it
Cash basis, which is recognizing income when you actually get paid

He goes on to explain that, “depending on the timing of income you earned and when you received it, the difference — and the taxes thereon — can be substantial.” You’ll still report the income either way, but for this year’s taxes, the way that you calculate it might make all of the difference.

Note For Those Who Worked From Home

Even if you aren’t a small business owner, you might have worked from home a lot in 2020 due to COVID-19. As a result, you may qualify to deduct your home office expenses. If you usually take the standard deduction, consider itemizing your deductions instead with this in mind.

4. Review All Credits and Deductions

Before you finish your taxes, you should make sure that you have applied to receive every credit and deduction that you qualify for. In case you are wondering, credits are direct refunds to you whereas deductions reduce the total amount of taxable income. Therefore, credits are slightly more preferable, but both are good for your bottom line. There are deductions and credits for people who are in school, parents, homeowners, and people who bought eco-friendly items.

Before you file your taxes, make sure that you’ve checked on the above ways to reduce your taxes. Then start planning right away for your 2021 taxes. After all, if you want to make the most of your money, you can’t rely on these last-minute tax tips alone. You also have to maximize charitable contributions and other things that you can only do before the end of the year if you want them to count on taxes.

Read More:

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5 Tips for an Easy Tax Return

March 17, 2021 By Rachel Slifka Leave a Comment

Ah, spring is around the corner….and that means tax season is here as well. If you haven’t filed your return yet, don’t wait! The deadline for filing your tax return is April 15, 2021. Fortunately, you can make this your smoothest tax year yet by taking a little time to get organized. Here are 5 tips for an easy tax return.

1) Make a List of All the Documents You Need

First thing is first – make a list of all the documents you need in order to file your tax return.

This likely includes documents, such as:

W-2s from your employer(s)

1099-DIV, which reports dividends and capital gains from investment accounts

1099-INT, which reports interest earned on investments

1099-MISC, which reports any miscellaneous income you may receive

1098, which reports interest paid on student loans or on a mortgage

Receipts from charitable contributions

Receipts from business expenses

Depending on your tax situation, you may have more documents than included on this list. If you have a particularly complex situation, you may want to consult with an accountant on how to best proceed with your taxes.

2) Organize Documents by Type

Once you have a list of all of the documents you need, it’s time to gather them. Chances are, once you received a tax document in the mail, you likely threw it into a pile with various other forms. Take the time to organize your tax forms by type, and make note of any documents you may be missing. The list you created in step 1 can serve as a checklist to keep you organized throughout the process.

Organize your forms by categories, such as “income,” “business expenses,” and “other.” This little step will make it so much easier once you actually file your taxes, because you won’t have to be shuffling around to find the form you need.

3) Follow Up on Any Missing Documents

As you’re going through your checklist, you may find you are missing some key documents. You will want to follow up on these immediately, as you won’t want to miss the deadline for filing your taxes. If you file your tax return late, you will be subject to fees and interest payments….not ideal.

Start by logging into your accounts online. For instance, your bank account may upload interest forms to your account online instead of mailing them to you. If you still can’t find the forms you need, give the organization a call and ask them to securely email it to you. That way, you have the tax form immediately.

4) File Your Taxes

Once you have all of the appropriate tax forms, you can actually file your taxes!

To file your taxes, you can choose the tax software of your choice, go through an accountant, or file online through the IRS. The choice is up to you and will depend on how complex your tax situation is.

5) Organize for Next Year

Congratulations – you submitted your tax return! While it can be tempting to shove your tax documents in a folder to never view until the following year, take a few extra minutes to organize for next year.

Organize your forms nicely and keep them in a folder or binder. Keep the checklist you made so you can see what documents you used this year. Think ahead to next year’s return. Are there other documents you already know you can expect to receive? For example, if you plan to switch employers this year, you will need to make sure to get a W-2 from each employer. Jot that down so you are more prepared for next year.

What Is The Best Way to Pay Capital Gains Taxes?

March 4, 2021 By Kathryn Vercillo Leave a Comment

It’s always nice to sell something for more than you paid for it. However, that sometimes means that you have “capital gains.” And that means that you have to pay capital gains taxes. What is the best way to pay those to maximize your profit?

What Are Capital Gains?

You purchase an asset. Later, you sell it for a profit. That’s all that capital gains are. Typically, they refer to the profit that you make when selling property, land, a business, and luxury items including art, antiques, and boats. You also can have capital gains from the sale of stocks, bonds, and other investments.

Short-Term vs. Long-Term Capital Gains

If you buy and sell the asset within one year, it’s typically considered short-term capital gains. Those are taxed at regular income tax rates.

On the other hand, if you wait over a year from the time of purchase to sell the asset, it’s typically considered a form of long-term capital gains. Long-term capital gains are taxed at lower rates than short-term capital gains. Therefore, if you want to maximize your profit by reducing your taxes, then often you’ll want to wait until after that one-year mark to make a sale.

Tip: If you are planning to sell your personal real estate, make sure that you’re aware of the exemptions for capital gains taxes on a primary residence. If you live in the house as your primary residence for long enough then you can avoid capital gains tax at the time of the sale. Therefore, timing is everything!

Net Capital Gains

You can have capital losses as well as capital gains. For example, let’s say that you sell a stock for $1000 less than you paid for it. That’s a capital loss of $1000. Now let’s say that in the same year, you sell a stock for a capital gain of $1000. You essentially break even. In terms of taxes on your capital gains, you can use the capital loss to offset the capital gain. So, you get taxed on your net capital gains, not on each capital gain. Note that net capital gains apply only to investments, not to other types of purchases.

Therefore, you might want to consider multiple big-ticket investment sales in the same year. Do you know you want to sell something that you have to take a loss on? If so, it’s great to do that in the same year as a big capital gains sale. The loss will offset the gains and reduce what you owe in taxes.

There is a maximum that you can deduct each year in net capital losses. However, you’re allowed to carry over the extra into the following year as a new deduction. Make sure that you’re aware of these types of options.

Likewise, if you realize midway through the year that you’ve accrued a lot of income in capital gains, then you might want to assess potential investment sales for the rest of the year. If they’ll be a loss, then you want to sell before the end of the year in order to offset your capital gains. On the other hand, if they’ll turn a profit, you might want to hold off until the following tax year. It’s important to pay attention to the timing of your asset sales for this reason.

Your Income Affects Your Capital Gains Tax Rate

Finally, you’ll want to take your overall income into consideration. Capital gains are taxed differently depending on your income. For 2020-21, the capital gains tax rates are for single filers are:

0% for income at or below $40,000
15% for income $40,001 to $441,450
20% for income at or exceeding $441,451

Therefore, if you’re right around the $40,000 income mark (or the $441,450 mark), then you might want to review sales and income carefully before proceeding with a sale in any given year. This strategy is called harvesting your long-term capital gains. Rates differ for married couples, heads of household, etc. For example, the 0% rate is doubled to $80,000 for married couples filing jointly.

What Is The Best Way to Pay Capital Gains Taxes?

Timing your sales with respect to how long you’ve had the asset, what your income is for the year, and our overall net capital gains will all assist you in reducing the amount that you have to pay in capital gains taxes. Be smart ahead of time and you won’t have to pay as much at tax time.

Ultimately, however, if you have short-term capital gains, you have to pay taxes on them. If you have long-term capital gains are earn an income higher than the 0% rate shown above, then you have to pay taxes on them. Therefore, you’ll want to learn about the best way to pay those taxes.

IRS Forms and Tips

The IRS offers the following forms and information to assist you in calculating and paying your capital gains tax each year:

Use Form 8948 to report your sales. This form will assist you in calculating your net capital gains for losses.
Schedule D on Form 1040 is used to summarize your capital gains and losses.
There is an additional Net Investment Income Tax for people who make a significant amount of money on investments. If this sounds like it applies to you, then make sure that you review those rules.
If you owe taxes on capital gains, then you might need to make estimated tax payments. Therefore, if you buy and sell stocks and other assets regularly, then pay attention to this. Failure to make those estimated tax payments could result in paying more over the long haul.

If you don’t pay estimate taxes then you’ll need to pay your capital gains tax at the time that you do your taxes each year. If you paid attention to the timing of sales during the year, then you should be able to limit what you owe. However, if you do end up owing taxes, it’s best to pay them right away. If you are unable to do so, then you can apply for installment payments to the IRS. However, you end up paying more over time if you do so. Therefore, any time that you make a big sale, you should put some of that money away in savings in anticipation of paying taxes on it the following April.

Bonus Tip: Maximize Your Retirement Contributions

Make sure that you’re putting as much money as allowed into a Roth IRA or Roth 401(k). These are tax-exempt accounts. So even though you earn interest on the money that you put in there, you don’t have to pay capital gains tax when you withdraw the money.

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Long and Short-Term Gains: What Are the Tax Implications?

March 2, 2021 By Jenny Smedra Leave a Comment

Two things in life are certain: death and taxes. However, the American tax code can make it very difficult to determine exactly how much you owe the federal government. It becomes even more complicated when the IRS sets varying rates on different kinds of income and fluctuating taxation brackets. However, arming yourself with information can save you a ton in taxes. That is why every investor should understand how long-term and short-term capital gains will affect their tax return.

What’s the Difference Between Long and Short-Term Gains?

Capital gains are the profits earned from selling your assets. They occur when you sell your asset for more money than you originally paid. Assets come in many forms. Some of the most common types include stocks, bonds, real estate, businesses, vehicles, jewelry, and precious metals. But, people often forget one very important detail. When you sell an asset, you must pay the capital gains tax based on the length of time you held it.

The federal government categorizes capital gains as either long-term or short-term. This designation determines the amount of taxes paid on an asset. Long-term capital gains are generated from assets that you have held longer than one year. Conversely, short-term gains are from assets that you had less than a year.

Taxation of Long and Short-Term Capital Gains

There is no way around the capital gains tax: you will have to pay taxes any time you sell off assets. However, the rate you pay depends on the holding time. For clarification purposes, the holding period begins the moment you acquire the asset. It lasts until, and includes, the day you sell it.

Taxation of Long-Term Gains

Since the Tax Cuts and Jobs Act (TCJA) in 2018, the treatment and taxation of long-term gains have changed. Prior to this, the brackets closely reflected the income brackets. However, the brackets were reconfigured under this new piece of legislation.

In general, the rates on long-term gains are more favorable. The government taxes a percentage of your long-term gains according to graduated thresholds of taxable income. These thresholds change from year to year. However, most taxpayers pay a rate of 15% or lower.

Taxation of Short-Term Gains

Unfortunately, short-term capital gains are taxed like ordinary income, meaning you will usually pay more. Your income includes your salary, wages, and gains from any investments you hold. The percentage is determined according to your tax bracket. The U.S. has seven federal tax brackets based on income, with rates ranging from 10% to 37%. One thing people often fail to consider is the added gains will increase your overall income. Not only could it push you into a higher tax bracket, but also increase the taxation rate. Depending on which tax bracket you fall into, the gains tax could be a significant amount of money.

Capital Gains Tax Considerations

In addition to how long you have held an asset, there are a few other tax implications and considerations when it comes to long and short-term gains.

State Taxation of Capital Gains

Each state has different tax laws as well. So, whether or not you pay state taxes on capital gains depends on where you live. Some states do not have income taxes. Therefore, they do not calculate capital gains taxes in Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming. If you are a resident of Colorado, Nevada, or New Mexico, you do not pay any capital gains taxes either. Taxpayers in Montana also enjoy a credit to help reduce the final totals owed to the IRS.

Capital Gains for Retirement Accounts

Eventually, you will also need to pay taxes on your retirement accounts too. However, you can defer tax payments on IRAs and retirement accounts until you withdraw money from them. When it comes time to pay though, the federal government will still tax it as ordinary income. Even if profits were generated from long-term gains, you do not qualify for the lower rates.

Exceptions from the Capital Gains Tax

As with all rules, there will always be exceptions to them. Here are a few you should be familiar with.

All collectibles are taxed at 28%. This includes any antiques, art, jewelry, coins, precious metals, or valuable collections. This is especially important when dealing with questions of inheritance and transferring items from estates.
If you sell your principal residence, you can exclude $250,000 of your capital gains from your taxable income. However, there is some fine print you will want to read twice. You must have owned and lived in the property for at least two years in the five years prior to the sale. But, if you qualify for the exemption, it could save you a ton of money in taxes.
The Net Investment Income Tax (NIIT) tacks an additional 3.8% of capital gains taxes if your income or investments exceed a certain maximum. This is usually applied to high earners who also have large capital gains on income generated from interest, dividends, and other investments.

When Taxes Come Due…

At the end of the day, the tax collector comes round to collect his dues. However, if you are well-informed, it could help you avoid paying more than you need to. First, you must remember that your net gains are calculated on a sliding scale. The price you paid, less depreciation, and costs incurred from the sale or improvement of the asset could decrease the total due. These factors all contribute to the final tally of your capital gains taxes.

It is also important to note here that you are also able to minimize capital gains taxes with time. As stated above, long-term gains receive much better rates. If you hold the asset until it can be qualified as long-term, you will likely pay less in taxes. So, if you are thinking about selling your newer assets, you may want to consider holding on to them until you can apply the lower rate.

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