Different tax systems: France and U.S.A

Different tax systems: France and U.S.A


  1. Worldwide vs. Territorial system


The US adopted a worldwide taxation system whereas most of the other countries have a territorial system, including France.

The worldwide system means that a corporation which has its headquarters in the US, or an individual residing in the US, will be taxed on its incomes whether they be earned in the US or abroad. Taxes will be paid when the foreign incomes are repatriated to the US. However, a credit system is allowed by the law. If the earnings are taxed abroad, the US will only require the company to pay the difference between the foreign percentage and the American one. For example, if the foreign percentage is 20% and the US one is 35%, the American government will only charge 15%.

France, which adopted a territorial system, only taxes French incomes of corporations and exempts most of the foreign incomes. The government will only tax the profits generated in France and not abroad. For individuals, France taxes incomes worldwide.


  1. Who is taxable?


The U.S classifies persons and entities distinguishing U.S persons and Foreign persons. U.S persons include citizens, residents, domestic partnerships, domestic corporations, any estate other than a foreign estate and any trust over which a U.S court can exercise supervision and U.S persons control the decisions taken. Foreign persons include nonresident aliens, foreign corporations, foreign partnerships, foreign trust and foreign estate.

Within those large categories, the U.S has different percentages of taxes for employees, students, professors…


  1. How are you taxed?


The U.S has two main levels of taxation, Federal and State. Within the Federal taxes, an individual or a corporation is taxable on income, social insurance, corporate, excise and estate. To these must be added the State taxes, which include sales, property, income, corporate, excise and others. If the Federal level applies the same percentage to each taxable person or entity, every State define its own percentage. In France, only the French government has the power of imposing taxes on its individuals and entities. The European Union was not given any authority in this field.

The U.S taxes income and social security separately. The taxable income is the gross income of an individual or a corporation less any allowable tax deductions. This income includes capital gains which the income earned from the sale of an asset. Regarding social security, following the Federal Contribution Act, employers must subtract payroll taxes of 7.65 percent from their workers’ paychecks. 6.2 percent go to fund the national social security system and 1.45 percent goes to medicare. In France, the charge of social security is on both the employee and the employer, with the employer paying a greater percentage.

The U.S, just like France, taxes the estate, which the property a person leaves behind after his/her death. In the event you leave more than the standard amount or you give away property while you are alive, your heirs will have to pay taxes on this inheritance and gift.

The U.S system includes a taxation on local property and estate but not on other assets such as corporate stocks, bonds or personal property. In other words, the wealth tax imposed by the French government does not exist in the U.S.


  1. When to file a return?


In terms of frequency of declarations to make, France and the USA have the same system. Taxable individuals and entities have to file a return every year for the year n-1. The return corresponding to the year 2017 must be filed in early 2018.




The Foreign Investment in Real Property Tax Act of 1980 covers the hypothesis of a foreigner who disposes of U.S real property interest. This includes sale, exchange, liquidation, redemption, gifts, transfers, etc.

If the transferor is a foreigner, the transferee must withhold 15% of the price. The withhold is intended to insure U.S taxation of gains realized on disposition of U.S interests. If the transferor is a foreigner and the transferee fails to withhold, he may be held liable for the tax himself.

There are some exceptions to this withholding rule, the most common one being the purchase of real estate for use as home and at a price equal or lower to $300,000.


  1. FATCA


The Foreign Account Tax Compliance Act is the way the USA deals with tax evasion. Under this act, U.S taxpayers must report to the IRS financial assets they hold abroad. Only individuals are required to make this declaration. This comes in addition to the Foreign Bank and Financial Accounts (FBAR) which requires U.S taxpayers to report foreign financial accounts. The threshold to be obligated to report the financial assets is of $50,000. This threshold varies depending on the filing status – single, married filing separately or married filing jointly – and whether you live in the U.S or abroad.

Assets are reported on Form 8938 which is attached to the annual tax return. However, it should be noted that there are some exceptions to this obligation to report depending on the nature of the asset and if assets are reported on other forms.


  1. Form 1040NR


This form must be completed and filed by nonresident aliens. An individual is considered a resident alien if he holds a green card or meets the substantial presence test. Under this last test, you are considered a resident if you are present in the U.S 31 days during the tax year considered and 183 days during the 3-year period including the tax year considered and the two previous ones.

You must file such a form if

  1. you are a nonresident alien engaged in a business or trade in the U.S;
  2. you received income from U.S sources that are reportable on schedule NEC;
  3. you are the representative of a deceased person who must file a 1040NR;
  4. you represent an estate or trust that must file a 1040NR.


There are three types of income that may need to be reported through a 1040NR:

  1. incomes connected with U.S business;
  2. income not connected with U.S business;
  3. income which is exempt from U.S tax.




The Future Now: Bitcoin & Cryptocurrency Updates

UPDATE August 21, 2019–Brickell, Miami, Florida

The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions, resulting from the Coinbase subpoena. The IRS claims that you potentially failed to report income and pay the resulting tax from virtual currency transactions, or that you did not report their transactions properly. Due to evolving and conflicting IRS guidance on the matter, this includes practically everyone who’s ever held crypto. So don’t be shocked you got a letter. Authentic letters look like the following:

IRS Crypto Letters
IRS Crypto Letters

Here is a direct IRS LINK:


UPDATE August 21, 2019–Brickell, Miami, Florida

The Internal Revenue Service has begun sending letters to taxpayers with virtual currency transactions, resulting from the Coinbase subpoena. The IRS claims that you potentially failed to report income and pay the resulting tax from virtual currency transactions, or that you did not report their transactions properly. Due to evolving and conflicting IRS guidance on the matter, this includes practically everyone who’s ever held crypto. So don;t be shocked you got a letter. Authentic letters look like the following:

UPDATE August 27, 2018–Brickell, Miami, Florida

MarketWatch and CNBC have postulated that Bitcoin is correlated to the emerging markets (MSCI Emerging Markets Index). According to Fundstrat’s Tom Lee, hedge funds avoid buying risk when there’s trouble in emerging markets. And when they aren’t buying risk, they’re surely not buying bitcoin. But when that appetite for risk returns, it’ll be enough to carry bitcoin to $25,000. Perhaps this year.

UPDATE August 21, 2018–Brickell, Miami, Florida

The New York Times has recently published an article about a few traders who were down substantially in crypto–After the Bitcoin Boom: Hard Lessons for Cryptocurrency Investors–some are down 70% to be precise.  Why did they invest? They got caught up in the fear of missing out. Many who invested during the boom are now in the red, meaning they’ve lost their initial investment. Many, however, who have recently invested, are probably in the black. Losses are likely particularly significant in South Korea and Japan, where crypto was embraced. Some people have lost their entire savings. They thought crypto was going to be a boom for the common worker.It was literally sticking it to the man! Some people regret investing so much of their savings into crypto without having a backup plan.

UPDATE August 20, 2018–Brickell Key, Miami, Florida

My client recently traveled to Canada, crossing the border from the United States. He’ said he has heard stories about people getting harassed about possibly carrying crypto; and he wanted to know what to say. First of all, perhaps you should consider backing up your wallet. Here’s an article on how to do it. After you’ve read that, here’s something you should consider. If you are carrying a thumbdrive, is itself currency or a monetary instrument.

The United States Customs and Border Protection website states:

What items must I declare when entering the United States?Upon entering the United States you must declare:

1- Items you purchased and/or carrying with you upon return to the United States. (Gifts purchased or received)

2- Items you inherited.

3- Items you bought in duty-free shops, on the ship, or on the plane.

4- Repairs or alterations to any items you took abroad and then brought back, even if the repairs/alterations were performed free of charge.

5- Items you brought home for someone else.

6- Items you intend to sell or use in your business, including business merchandise that you took out of the United States on your trip.

7- All monetary instruments such as traveler’s checks, cash, gold coins, negotiable checks, money orders, promissory notes, and securities or stocks.

I cannot give legal advice in a written article because your individual circumstances may be different. However, generally speaking, think of your cryptocurrency like a bank account, and your thumbdrive as the checkbook. You wouldn’t be required to report your bank balances. However, be aware, that if you purchased cryptocurrency overseas, then this seems to fall within #1 above. It’s always arguable that it falls within #7. It also may depend upon the reason you are carrying the crypto. If you are carrying it to commit a crime such as money laundering, then this is illegal. If you are carrying it because you will need some currency when you travel, then perhaps the result is different. In either case, we recommend that you discuss this PRIOR to getting in trouble with the police. I am checking out a site called moneymunk who asked me to link their article. If you have had any experience with their service, or have looked at their Bitcoin 101 article, please let me know.

CLICK HERE for The top ten questions you should ask before investing in #blockchain #bitcoin #ripple #ethereum #bitcoincash #cardano #stellar #litecoin #XEM #MIOTA #Dash #cruptocurrency #altcoin #darkcoin

Bitcoin $40,000…per CNBC…and Michael Novogratz CLICK HERE. But… in meantime…Bitcoin to drop to $8,000…CLICK HERE… and Novogratz to form a full service, digital assets cryptocurrency “merchant bank.” CLICK HERE.  Also…Crypto could be largest bubble in our lifetimes. Here.

My Current Investment Thesis: The market price of Bitcoin may not reflect demand because of the backlog in opening accounts. I have been waiting for 2 months for an account at bitstamp (and many other exchanges). Bitmain has sold out in less than an hour. In any event, if you are not making your livelihood with Bitcoin, do not invest more than you are willing to lose.

UPDATE April 18, 2018–Brickell Key, Miami, Florida

The Internal Revenue Service announced today that it is providing taxpayers an additional day to file and pay their taxes following system issues that surfaced early on the April 17 tax deadline. Individuals and businesses with a filing or payment due date of April 17 will now have until midnight on Wednesday, April 18. Taxpayers do not need to do anything to receive this extra time.

The IRS encountered system issues Tuesday morning. Throughout the system outage, taxpayers were still able to file their tax returns electronically through their software providers and Free File. Taxpayers using paper to file and pay their taxes at the deadline were not affected by the system issue.

“This is the busiest tax day of the year, and the IRS apologizes for the inconvenience this system issue caused for taxpayers,” said Acting IRS Commissioner David Kautter. “The IRS appreciates everyone’s patience during this period. The extra time will help taxpayers affected by this situation.”

UPDATE April 5, 2018–Brickell Key, Miami, Florida aka Claughton Island aka Burlingame Island.

On October 16, 2014, Bitstamp provided the following notice


16 OCT 2014

Dear Bitstamp clients,

Despite being notified of change in our Verification Policy more than a year ago on 4th September 2013, some accounts remain unverified.

Bitstamp cannot allow unverified accounts to trade or offer any other services, as doing so would violate our AML and KYC policies. Read our AML policy here.

We kindly ask all unverified account holders with a balance to get verified within 28 days of this announcement.

Failure to do so constitutes a breach of our Agreement and failure to remedy that breach. This will automatically result in the following: all unverified accounts holding a balance will be terminated, access rights will be removed, and the holders of these accounts will no longer be considered Bitstamp customers.

Any remaining balances will be subject to immediate seizure by and forfeiture to regulatory authorities.

Please take these simple verification steps immediately. You can verify your Bitstamp account here or contact our support at support@bitstamp.net

Best regards,
Bitstamp Team

Upon inquiry of Bitstamp support, many clients received an email as follows:

Dear Client,

As you know, your Account was terminated in November 2014 as part of our new, stricter verification program that is intended to protect Bitstamp and our customers against illegal activities and government enforcement actions.

For more info see: https://www.bitstamp.net/article/final-notice-to-unverified-account-holders/ As you did not respond to our multiple notifications, your Account and its balance got seized by the US government in accordance with our notification.

* * * 

Many people were scared and did not want to pursue the matter because the price of Bitcoin was only a few hundred dollars, and had dropped after reaching highs above $1,000+ in early 2014.

If you lost Bitcoin and couldn’t recover it, it may be possible to claim a loss for purposes of income taxes.

UPDATE February 15, 2018–Brickell Key, Miami, Florida aka Claughton Island aka Burlingame Island.

Bitcoin is roaring back. Fundstrat Global Advisors LLC’s Tom Lee: Based on an analysis of the 22 corrections of 20 percent or more that Bitcoin has seen since 2010, Lee determined that in “bull” periods, Bitcoin takes about 1.7 times the duration of its decline to recover. That time frame implies that it will take 85 days for the cryptocurrency to fully bounce back from its latest plunge, which lasted for 50 days — meaning it should rise to fresh records by July 2018. Courtesy Bloomberg

UPDATE February 9, 2018–Brickell Key, Miami, Florida aka Claughton Island aka Burlingame Island.

Forbes’ First List Of Cryptocurrency’s Richest: Meet The Secretive Freaks, Geeks And Visionaries Minting Billions From Bitcoin Mania.

Chris Larsen, Joseph Lubin, Changpeng Zhao, Tyler Winklevoss, Cameron Winklevoss, Matthew Mellon, Brian Armstrong, Matthew Roszak, Anthony Di Iorio, Brock Pierce, Michael Novogratz, Brendan Blumer, Dan Larimer, Valery Vavilov, Charles Hoskinson, Brad Garlinghouse, Barry Silbert, Vitalik, Buterin, Tim Draper, Son Shi-Hyung.

UPDATE January 25, 2018–Quito, Ecuador.

Robinhood plans Bitcoin and Ether while Stripe ending Bitcoin support

The stock-trading company Robinhood plans to offer free Bitcoin and Ether trading services. The company hopes to attract crypto-traders to its traditional securities offerings. READ MORE. I have often spoken about how to invest in crypto. For those who are new to crypto, I recommend you don’t invest more than you are willing to lose. Or stated another way, invest the most you’d be comfortable losing. For the experienced, those who trade, monitor and make their livelihood from crypto, it’s a question of diversification. Some of my clients don’t want to pay me using crypto because to them it’s their most valuable asset. They’d rather give me the shirt off their back. Conversely, in other news, payment processor Stripe announced plans to phase out Bitcoin because it has evolved to become better-suited to being an asset than being a means of exchange. Citing longer transaction times, more transaction failures, and increased transaction fees, Stripe will be “winding down” support for Bitcoin Transactions. READ MORE.  What seems to be apparent to me is that Bitcoin is becoming a store of value vis-a-vis a means of exchange. Bitcoin was developed as a peer-to-peer electronic cryptographic payment system. It is evolving into more of a store of value. Right now, I think I agree with Stripe.

UPDATE January 16, 2018–Albany, NY.

Researchers find that one person likely drove Bitcoin from $150 to $1,000.

Researchers Neil Gandal, JT Hamrick, Tyler Moore, and Tali Oberman wrote a paper on “Price Manipulation in the Bitcoin Ecosystem” in the Journal of Monetary Economics. The paper identifies and analyzes the impact of suspicious trading activity on the Mt. Gox Bitcoin currency exchange, in which approximately 600,000 bitcoins (BTC) valued at $188 million were fraudulently acquired. Read More.

UPDATE January 7, 2018–Miami, Fla.

Coin Marketcap

The market cap of 1,384 coins tracked by Coin Market Cap now exceeds $820.1 Billion dollars. As of January 3rd, our calculations showed the market cap was less than $800 Billion–just a few days ago. The top ten list has changed since then as well. NEM has moved from the #8 spot to the #6 spot, increasing its market cap from $13 bn to $16 bn.


The North American Securities Administrators Association or NASAA issued a statement cautioning investors when considering investment in cryptocurrencies. The statement reads:

Investors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies. 94 percent of state and provincial securities regulators believe there is a “high risk of fraud” involving cryptocurrencies.

Cryptocurrencies are a medium of exchange that are created and stored electronically in the blockchain, a distributed public database that keeps a permanent record of digital transactions. Current common cryptocurrencies include Bitcoin, Ethereum and Litecoin. Unlike traditional currency, these alternatives have no physical form and typically are not backed by tangible assets. They are not insured or controlled by a central bank or other governmental authority, cannot always be exchanged for other commodities, and are subject to little or no regulation.

Unlike an Initial Public Offering (IPO) when a company sells stocks in order to raise capital, an ICO sells “tokens” in order to fund a project, usually related to the blockchain. The token likely has no value at the time of purchase. Some tokens constitute, or may be exchangeable for a new cryptocurrency to be launched by the project, while others entitle investors to a discount, or early rights to a product or service proposed to be offered by the project.

NASAA’s animated video

CJZFirm’s top ten questions you should ask

What is Bitcoin?

I recently took a dive into Satoshi Nakamoto’s white paper Bitcoin: A Peer-to-Peer Electronic Cash System. The Abstract sums it up pretty well…

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

The brilliance in the idea is the decentralized nature of the system. The users of the network, or peers, democratically control the system. So long as the number of honest users exceeds the number of attackers, the system functions.

If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains.

Perhaps the genius in the system is what separates bitcoin from other coins and coin-based systems. Since Bitcoin has been around longer than many newer coins, it is inherently more trustworthy and less susceptible to attack.

The probability of a slower attacker catching up diminishes exponentially as subsequent blocks are added.

The inherit vulnerability in newer coin systems could be their undoing. Or not depending upon system design.

If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins. He ought to find it more profitable to play by the rules, such rules that favour him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.

However, an attacker to the system cannot overtake it.

Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent.

Interestingly, I have often wondered what might happen when the 21 million bitcoins have been issued.

Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free.

So in sum, Bitcoin is a system that utilizes electronic coins as a medium of exchange. And to remedy the problem of double spending, the system relies upon a system of honest computing where public transactions are recorded.

UPDATE January 5, 2018–Miami, Fla.

Ripple is in the news with a $100 Billion Controversy: XRP’s Surge Raises Hard Questions for Ripple. The price of XRP is up over 1,000 percent in just the last month alone, eclipsing $3.50 per coin Thursday after spending much of 2017 under $0.30. With a market capitalization above $120 billion, the token has usurped ethereum as the No. 2 cryptocurrency after bitcoin. Ripple has had a complex relationship with XRP – at times touting it as a way for banks to transact seamlessly across borders, while at other points describing it as a benign value-add to enterprise versions of the company’s software. Read More Here


It speaks volumes to the state of the cryptocurrency space in that a currency with a dog on it, which hasn’t released a software update in over 2 years has a market cap of $1 Billion US Dollars. Technology development has suffered its ups and downs because its developers are all volunteers, contributing their spare time to its development. THis si not to say that Dogecoin is not worthy. As discussed in

Blockchain influencers

Coindesk has named its most influential people in the Blockchain of 2017: (10) Jihan Wu, founder of Bitmain (9) Amber Baldet, executive director of JP Morgan’s Blockchain Center of Excellence (8)  Erik Voorhees, ShapeShift and early entrepreneur, (7) Pieter Wuille, Blockstream, (6) Yao Qian, director of the PBOC’s Digital Currency Research Institute (5) Joe Lubin co founder ethereum (4) Naval Ravikant founder of Angel List (3) Charlie Lee, aka Satoshi Lite – founder of Litecoin (2) Jamie Dimon, CEO of JPMorgan Bank. (1) But if Bitcoin Sign Guy–the guy who held up a Bitcoin sign behind the federal reserve chair’s testimony.

UPDATE January 4, 2018–Miami, Fla.

Top Ten Questions before investing in an ICO

I wanted to share an important update about investing in an ICO or initial coin offering. The website ICOAlert lists many ICOs and pre-ICOs for tokens and coins. One thing you should be aware of before you invest is whether you are investing in the token itself by cashing out insiders, or are you investing in tokens which are being used to fund a blockchain technology company. Please make sure you have read the white paper issued by the coin before investing. Furthermore, please make sure you have the questions from the section below titled Questions for Investors Considering a Cryptocurrency or ICO Investment Opportunity.

The top ten questions are:

  1. Who exactly am I contracting with?
    • Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product?
    • Do they have a clear written business plan that I understand?
    • Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product?
    • Have they been paid to promote the product?
    • Where is the enterprise located?
  2. Where is my money going and what will be it be used for?
    • Is my money going to be used to “cash out” others?
  3. What specific rights come with my investment?
  4. Are there financial statements?
    • If so, are they audited, and by whom?
  5. Is there trading data?
    • If so, is there some way to verify it?
  6. How, when, and at what cost can I sell my investment?
    • For example, do I have a right to give the token or coin back to the company or to receive a refund?
    • Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
  7. If a digital wallet is involved, what happens if I lose the key?
  8. Are there substantial risks of theft or loss, including from hacking?
  9. If a blockchain is used, is the blockchain open and public?
    • Has the code been published, and has there been an independent cybersecurity audit?
  10. Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
    • What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects?
    • Who will be responsible for refunding my investment if something goes wrong?

#1 Most Important: Don’t invest more money than you would be willing to lose.

UPDATE January 3, 2018–Miami, Fla. 

Bitcoin is trading at $15,078 @12:11 PM ET.


The top ten coins and their market capitalizations as of January 3rd 2018 are:

(1) Bitcoin BTC $256,482,018,122
(2) Ripple XRP $112,333,060,48
(3) Ethereum ETH $86,239,764,040
(4) Bitcoin Cash BCH $45,652,521,915
(5) Cardano ADA $26,673,251,628
(6) Stellar XLM $15,485,502,222
(7) Litecoin LTC $13,627,818,835
(8) NEM XEM $13,319,279,999
(9) IOTA MIOTA $11,185,747,104
(10) Dash DASH $9,119,265,021

UPDATE January 2, 2018 — Baltimore, Md.

Bitcoin is trading at $13,867 @10:10AM ET. 

Bitcoin has risen 1,300%: What the biggest names in finance are saying


Peter Thiel: ‘Great potentialWhile skeptical, “If bitcoin ends up being the cyber equivalent of gold, it has a great potential left”.

Cameron Winklevoss: ‘A multitrillion-dollar asset’ “Long-term, directionally, it is a multitrillion-dollar asset,” Cameron Winklevoss, who founded bitcoin exchange Gemini with his twin brother Tyler, said in December.

Tim Draper: ‘The greatest technology since the internet’ “This is the greatest technology since the internet. This is a sociological transformation, it’s a movement,” Silicon Valley venture capitalist Tim Draper said in November.


Jamie Dimon: ‘If you’re stupid enough to buy it you’ll pay the price for it one day,” Jamie Dimon, CEO of JPMorgan Chase said in October, predicting governments would eventually “crush it.”

Janet Yellen: ‘It is a highly speculative asset’

“It is not a stable source of value and it does not constitute legal tender. It is a highly speculative asset,” Janet Yellen, the chair of the Federal Reserve, said last month.

Warren Buffett: ‘A real bubble’

“You can’t value bitcoin because it’s not a value-producing asset,” renowned investor Warren Buffett said in October. He added that its unpredictable price makes it a “real bubble in that sort of thing.”

Lloyd Blankfein: ‘A vehicle to perpetrate fraud’

“Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud,” Goldman Sachs CEO Lloyd Blankfein said in November.

Joseph Stiglitz: It ‘ought to be outlawed’

“Bitcoin is successful only because of its potential for circumvention. It doesn’t serve any socially useful function,” Nobel laureate Joseph Stiglitz said in November.

Bloomberg’s Cryptocurrency Explanation Video

Companies Investing in Blockchain

IBM, Toyota, and Microsoft have invested in blockchain technology. What prevents widespread adoption? Fraud and Regulation. In July 2017, the SEC announced that federal securities laws likely apply to cryptocurrencies requiring ICOs to be registered. China and South Korea have outlawed ICOs (Initial Coin Offerings) and coin exchanges. Switzerland imposed rules on how coins go to market. Venezuelan miners have been jailed.


UPDATE December 24, 2017 — Miami, Fla.

Bitcoin is trading at $13,110 @1:39PM ET as I write this article, adding to a 30% selloff since Bitcoin reached an all-time high of $19,666 on December 16. 2017. Bitcoin traded as low as $11,159 on December 21st. I recently reported the cryptocurrency had slightly recovered on December 22, 2017, as it was trading at $14,692.25 at 10pm.

“The crypto market went to astronomical highs, so it’s got to come back to reality,” said Mati Greenspan, senior market analyst at Tel Aviv-based online broker eToro. “Something that goes up 150 percent in less than a month is probably going to have double-digit retracement.”

Ethereum, the No. 2 cryptocurrency by market value, also dropped 13 percent in the past 24 hours, to $651.16

Bitcoin has its critics.

Morgan Stanley analyst James Faucette and his team sent a research note to clients a few days ago suggesting that the real value of bitcoin might be … $0. His research report (titled “Bitcoin decrypted”) did not give a price target for bitcoin. But in a section titled “Attempts to Value Bitcoin,” Faucette described why it is so hard to ascribe value to the cryptocurrency. It’s not like a currency, it’s not like gold, and it has had difficulty scaling.

Data from Morgan Stanley’s report show that Bitcoin is scarcely accepted by the top 500 e commerce merchants. In Q1 of 2016 just 5 of the top 500 merchants accepted it. In Q3 of 2017, just 3 accepted it. Several local merchants in Miami have announced they will accept Bitcoin as payment. However, Coinbase’s website states “We’re no longer accepting new merchant services businesses. Stay tuned for new offerings that are coming soon.”

JPMorgan CEO James Dimon claimed that he would fire any trader who was found to be trading in bitcoin, calling Bitcoin a “fraud.”

As cryptocurrency seems poised to have a huge impact on the world’s economy, we’re also going to see more of its environmental effect because computer programs that mine cryptocurrency require energy.

In November, a federal judge ordered CoinBase to supply the IRS with details of users who bought, sold, sent, or received $20,000 or more in the cryptocurrency in a single year between 2013 and 2015.


The SEC has announced cryptocurrency ICO initial coin offerings are subject to the securities laws. Importantly, there is substantially less investor protection than in traditional securities markets, with correspondingly greater opportunities for fraud and manipulation. To date, no initial coin offerings have been registered with the SEC.  The SEC also has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies.

As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, exercise extreme caution and be aware of the risk that your investment may be lost. ICO markets span national borders and significant trading may occur on systems and platforms outside the United States. Invested funds may quickly travel overseas without your knowledge.  As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.

Initial Coin Offerings.

Typically these offerings involve the opportunity for individual investors to exchange currency such as U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token. Many ICOs issue White Papers as an offering document. Ask good questions, demand clear answers and apply good common sense when doing so.

Halted Initial Coin Offerings and Tokens

RECoin touted by Maksim Zaslavskiy as “The First Ever Cryptocurrency Backed by Real Estate”  was deemed fraudulent by the SEC.

Munchee Inc’s ICO was halted for failing to register with the SEC, although fraud was not involved.

PlexCoin was deemed fraudulent as introduced by recidivist Dominic Lacroix and his partner Sabrina Paradis-Royer.

Questions for Investors Considering a Cryptocurrency or ICO
Investment Opportunity

  • Is the product legal?
  • Is it subject to regulation, including rules designed to protect investors?
  • Does the product comply with those rules?
  • Is the offering legal?
  • Are those offering the product licensed to do so?
  • Are the trading markets fair?
  • Can prices on those markets be manipulated?
  • Can I sell when I want to?
  • Are there substantial risks of theft or loss, including from hacking?
  • Who exactly am I contracting with?
    • Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product?
    • Do they have a clear written business plan that I understand?
    • Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product?
    • Have they been paid to promote the product?
    • Where is the enterprise located?
  • Where is my money going and what will be it be used for?
    • Is my money going to be used to “cash out” others?
  • What specific rights come with my investment?
  • Are there financial statements?
    • If so, are they audited, and by whom?
  • Is there trading data?
    • If so, is there some way to verify it?
  • How, when, and at what cost can I sell my investment?
    • For example, do I have a right to give the token or coin back to the company or to receive a refund?
    • Can I resell the coin or token, and if so, are there any limitations on my ability to resell?
  • If a digital wallet is involved, what happens if I lose the key?
    • Will I still have access to my investment?
  • If a blockchain is used, is the blockchain open and public?
    • Has the code been published, and has there been an independent cybersecurity audit?
  • Has the offering been structured to comply with the securities laws and, if not, what implications will that have for the stability of the enterprise and the value of my investment?
  • What legal protections may or may not be available in the event of fraud, a hack, malware, or a downturn in business prospects?
    • Who will be responsible for refunding my investment if something goes wrong?
  • If I do have legal rights, can I effectively enforce them and will there be adequate funds to compensate me if my rights are violated?

What is a blockchain?

A blockchain is an electronic distributed ledger or list of entries – much like a stock ledger – that is maintained by various participants in a network of computers.  Blockchains use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users of the blockchain that entries are secure.  Some examples of blockchain are the Bitcoin and Ethereum blockchains, which are used to create and track transactions in bitcoin and ether, respectively.

What is a virtual currency or virtual token or coin?

A virtual currency is a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account, or store of value.  Virtual tokens or coins may represent other rights as well.  Accordingly, in certain cases, the tokens or coins will be securities and may not be lawfully sold without registration with the SEC or pursuant to an exemption from registration.

What is a virtual currency exchange?

A virtual currency exchange is a person or entity that exchanges virtual currency for fiat currency, funds, or other forms of virtual currency.  Virtual currency exchanges typically charge fees for these services.  Secondary market trading of virtual tokens or coins may also occur on an exchange.  These exchanges may not be registered securities exchanges or alternative trading systems regulated under the federal securities laws.  Accordingly, in purchasing and selling virtual coins and tokens, you may not have the same protections that would apply in the case of stocks listed on an exchange.

Who issues virtual tokens or coins?

Virtual tokens or coins may be issued by a virtual organization or other capital raising entity.  A virtual organization is an organization embodied in computer code and executed on a distributed ledger or blockchain.  The code, often called a “smart contract,” serves to automate certain functions of the organization, which may include the issuance of certain virtual coins or tokens.  The DAO, which was a decentralized autonomous organization, is an example of a virtual organization.

Source: SEC Investor Bulletin

Per Coinbase on January 4, 2018:

Do taxes apply to virtual currency gains?

Yes. Although Coinbase cannot provide legal or tax advice, the U.S. Internal Revenue Service has released guidelines for how to report and pay taxes relating to digital currency activity. You can read them on the official IRS.gov website here: http://www.irs.gov/pub/irs-drop/n-14-21.pdf.

We remind all our customers, both US and international, that you have a responsibility to self-report and pay taxes on all taxable gains. Please consult with your accountant or tax advisor to ensure that you file and pay taxes correctly.

Will Coinbase send me a 1099 or similar form?

For U.S. users only, Coinbase provides Forms 1099-K to certain business users and GDAX users that have received at least $20,000 cash for sales of cryptocurrency related to at least 200 transactions in a calendar year.

Does Coinbase provide other tax reporting information?

You should refer to your account transaction history for records to compute your gains and losses over a given period. As a convenience to our customers, Coinbase also provides a Cost Basis for Taxes report (in beta) which will help with filing your taxes.

This report provides a summary of your digital currency purchases and sales, showing your cost basis and capital gain/loss.

We use a FIFO (first in first out) method for this report. Transactions sending into or out of your Coinbase wallet are treated as buys or sells at the current market price in this report. However, you should keep your own records for best results and update the report accordingly. For example, if you transfer funds offsite to a desktop wallet, and then back again, you would not count this as a sale of digital currency.

You can generate the report here, by clicking on “New Report” in the upper right hand corner.

Note that if you have any deleted digital currency wallets within your Coinbase account, they will not appear in the report generation tool. To restore them, navigate to your accounts page, select “Show Deleted” at the bottom, and then un-delete the wallet you’d like to run a report on.

Our cost basis tool is in beta mode and we do not guarantee the accuracy of gain/loss calculation provided. You should always refer to your account transaction records for the details of all trades. We expect the cost basis tool to be released in final version in January 2018.

Disclaimer: This report does not constitute legal or tax advice. Tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Coinbase disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns.

End of Coinbase Statement.

Bitcoin Taxes Update (Internal Revenue Service)

  1. Wages paid to employees using virtual currency are taxable. Therefore, they must be reported on Form W-2. Wages are subject to federal income tax withholding and payroll taxes.
  2. Payments made to independent contractors using virtual currency are taxable and self-employment tax rules apply. Payers must issue Form 1099.
  3. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset.
  4. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
  5. Some advisers have taken the position that exchanges of Bitcoin could be treated as like-kind exchanges, under section 1031 of the Internal Revenue Code. The Tax Cuts and Jobs Act of 2017 limits 1031 exchanges to real property. This eliminates the possibility of like-kind exchange treatment for virtual currencies after December 31, 2017.

Like-Kind Exchange Section 1031

Much discussion has been circulated through message boards and chat rooms concerning whether 1031 exchanges apply to cryptocurrencies such as bitcoin. Why use section 1031? The idea is that if trading coins or tokens qualifies as a like-kind exchange, tax that would otherwise be due in the year of the sale or exchange is deferred. That means you will owe them but you will not owe the in the current year. So the tax deferral, called non-recognition of income, is like a interest free loan.

Section 1031 (26 U.S.C.1031 or I.R.C. 1031) allows property held for use in a trade or business, or for investment be traded for another property held in trade or business, or investment. The property must be of like-kind. Cryptocurrencies are intangible personal property. Thus, an exchange of nondepreciable intangible personal property qualifies for nonrecognition of gain or loss under section 1031 only if the exchanged properties are of a like kind without regard to whether they are of like class. For example, Treasury Bonds with differing maturity dates are not like-kind. The problem is that section 1031 does not allow exchanges of securities or stocks. And the SEC is now calling some coin and token offerings “securities.”

Another point is that like-kind exchanges have special forms that need to be filed with your tax return.

Wash Sale Rule

I haven’t seen much written about the wash sale rule with respect to cryptocurrencies. If it applies because coins and tokens are deemed securities, you should know the following:

  • The wash-sale rule was designed to discourage people from selling securities at a loss simply to claim a tax benefit.
  • A wash sale occurs when you sell a security at a loss and then purchase that same security or “substantially identical” securities within 30 days (before or after the sale date).
  • If you end up being affected by the wash-sale rule, your loss will be disallowed and added to the cost basis of the securities you repurchased.

Again, it may not apply, but ask any professional investor and the wash sale rule is on their radar.

Bitcoin IRS Disclosure

Are you worried about the IRS discovering your Bitstamp or Coinbase account? There’s reason to worry as the IRS is aggressively pursing John Doe Subpoenas against crypto wallets. A federal court has recently ordered disclosure to the IRS of all accounts above $10,000. “Now” is the time to get into compliance with the IRS before you receive an audit letter. You should not represent yourself. Your counsel should pursue a strategy of minimizing penalties and interest. Failing to report income from bitcoin, litecoin, ethereum, bitcoin cash, and altcoin transactions could constitute a crime. The IRS is secretly pursuing people who have failed to report cryptocurrency transactions on their income tax returns. If you are a US citizen or resident, you must report income from all sources within and outside of the U.S.  This is true whether you received a W-2 or 1099.

BITCOIN F.A.Q. — Frequently Asked Questions

What is Bitcoin?

Bitcoin is a peer-to-peer electronic cash system. It is intended as a means of payment. Bitcoin is called a cryptocurrency because it is encrypted. Bitcoin relies on two encryption keys. One public and one privately created.

Who created Bitcoin and when?

Satoshi Nakamoto created Bitcoin in 2009.

How does Bitcoin work? 

Bitcoin relies upon Blockchain technology to function. The Blockchain is the record keeping system (or ledger of transactions) that Bitcoin, and many other virtual currencies for that matter, rely upon to function. Bitcoins are registered to address keys. The Blockchain records Bitcoin transactions and the history of the Bitcoin ownership.

What are Bitcoin Miners?

Miners facilitate Bitcoin transactions. Bitcoin users who transact Bitcoins with another party, rely upon miners to perform the transaction. The miners are rewarded with Bitcoins. New Bitcoins are created every day as a reward for Bitcoin mining.

How are Bitcoin Miners paid? 

The successful miner is rewarded with newly created bitcoins and transaction fees. As of 9 July 2016, the reward amounted to 12.5 newly created bitcoins per block added to the blockchain. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years).

Is there a limit on the number of Bitcoins?

Yes, 21 million Bitcoins.

What is a Bitcoin Hash Rate?

The hash rate is a measuring unit of the processing power of the Bitcoin network. The Bitcoin network is required to make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.

Who administers Bitcoin? 

Bitcoin is a decentralized currency. There is no government or authority that administers Bitcoin. Bitcoin was created as an open source software. The decentralized Blockchain consists of numerous independent computers that store copies of the ledger across the globe.

Is Bitcoin Legal? 

In the US, Bitcoin is legal. However, in some countries such as Malta and Venezuela, it may be illegal. Furthermore, in other places, Bitcoin may have restrictions.

Is Bitcoin subject to taxes? 

In the USA, yes. If you receive Bitcoin for services, it may be includable in income and you are required to report it on your IRS Form 1040. If you sell appreciated Bitcoin, you may owe capital gains taxes.

What is bitcoin cash?

Bitcoin Cash (BCH) is a direct result of a Bitcoin fork that occurred on August 1, 2017. It is an alternate version of Bitcoin that makes use of new features and rules, and has a different development roadmap. For more information on Bitcoin Cash, see www.bitcoincash.org

What is Coinbase?

Coinbase is a secure online platform for buying, selling, transferring, and storing digital currency. Its mission is to create an open financial system for the world and to be the leading global brand for helping people convert digital currency into and out of their local currency.

Coinbase aims to:

  • Make buying and selling digital currency easy.

  • Make sending or receiving digital currency between online wallets, friends, or merchants on Coinbase free!

  • Handle security and backups so you don’t have to worry.

  • Be a “one stop shop” – offer a wallet, an exchange, and merchant tools in one interface.

  • Coinbase is a platform on which many applications are being built using its API.

What is Litecoin?

Litecoin is similar to Bitcoin. In some ways it is a direct competitor. Like Bitcoin, Litecoin exists as a blockchain where participating nodes process transactions and miners provide security and verification for those transactions.

Charlie Lee conceived and developed Litecoin in 2011 by Charlie Lee. For a period of time, Charlie was a Director of Engineering at Coinbase, having joined in 2013. Since its launch in 2011, Litecoin has seen steady adoption with an active community of traders, merchants, and developers. Thus, Litecoin is likely here to stay and will continue to play an important role in cryptocurrency and digital asset development.

What is Ethereum?

Vitalik Buter founded Ethereum in 2014 as a decentralized blockchain platform. Like Bitcoin, Ethereum is an open-source project that is not owned or operated by a single individual. This means that anyone, anywhere, can download the software and begin interacting with the network.

Unlike the Bitcoin network, the primary purpose of Ethereum is not to act as a form of currency, but to allow those interacting with the Ethereum Network to make and operate ‘smart contracts’ without having to trust each other or use a middleman. Smart contracts are applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third party interference – a smart contract works exactly the same every time it’s used.

Ethereum uses a ‘virtual machine’ to achieve all this, which is like a giant, global computer made up of many individual computers running the Ethereum software. Ether is the virtual currency unit that allows this system to work. People interact with the Etherum network by using ether to pay the network to execute smart contracts.

Ethereum aims to take the decentralization, security, and openness afforded by blockchains and extend those to virtually anything that can be computed.

About the Author

Charles Zimmerer ESQ, CPA, is a licensed investment advisor. He is president of Charles J Zimmerer PA, a tax and investment consulting firm. www.cjzfirm.com. Mr. Zimmerer’s firm assists taxpayers with their tax questions. Also, the firm also helps people with liquidating their Bitcoin holdings and diversifying their investments. If you would like to speak with him, please contact him here Contact Here.


Price and Trading data provided by Bitstamp; Bloomberg; and CoinMarketCap. Tax data provided by CJZFirm.com and IRS. Also see Bitcoin.org and Coinbase, SEC, and ICO Alert, ft.comwww.fatf-gafi.org and Coinschedule. Coindesk.

Bitcoin’s down…But remember…the Empire always strikes back…

Bitcoin is trading at $14,692.25 at 10:51 PM December 22, 2017 according to Bitstamp. Bitcoin once traded as high as $19,187.78 on December 16th.

Unfortunately, today’s price drop in Bitcoin of as much as 30% is nothing short of a rout. Coinbase, among the world’s largest cryptocurrency exchanges, said all buying and selling was temporarily disabled today from delays in processing wire transfers, verifying new customers, and high traffic.

We know from the Star Wars trilogy that the Empire strikes back. Luke Skywalker gets his tail kicked. That’s capitalism. Markets rise and markets fall. But in the end, the Rebels win. Luke Skywalker blows up the Death Star and then parties on the forest moon of Endor in a treehouse with the Ewoks.

This week’s losses represent a major test for the cryptocurrency industry and the blockchain technology that underpins it.

Bears–those forecasting the cryptocurrencies will fall in value–cast doubt on the value of the virtual assets. Financial powerhouse UBS called bitcoin the “biggest speculative bubble in history.” Bulls–those who believe the currency will rise in value–argue the technology is a game changer for the world of investment and finance.

Everyone will be closely watching the outcome of the current selloff.

Long Island Iced Tea Corp shares rose as much as 289% after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. Similarly, Longfin CEO Venkat Meenavalli called the metoeric rise in his company’s stock price from $5 to $130 pure speculation. He said, it’s “insane.” Longfin acquired Ziddu.com, a website positioning itself as a blockchain-linked provider of financing for small businesses in emerging markets using Bitcoin and Ethereum.

Bank of Japan Governor Haruhiko Kuroda said Bitcoin isn’t functioning like a normal means of payment and is being used for speculation.

Michael Novogratz, a former Goldman Sachs Group macro trader, said he’s putting plans to start a cryptocurrency hedge fund on the back burner. He predicted that bitcoin may extend its plunge to $8,000.

Like Star Wars, Bitcoin could come back strong.

Novogratz also said that bitcoin could reach $40,000 within a few months. Goldman Sachs Group is setting up a trading desk to make markets in digital currencies such as bitcoin. Bitcoin futures are now traded on the CBOE and CME.

If you’d like to read an article on the price history of cryptocurrencies, click here.

In any event, don’t forget that you’ll owe income taxes on Bitcoin when you’re ready to sell and that’s where we come in. Thanks to my cryptocurrency tax consulting, I was the #1 attorney in Miami and #16 attorney in the US this week by profile views on martindale.com.

I also was recently awarded a Gold Client Champion Award for 2017. Please visit my site if you’d like to discuss your cryptocurrency holdings such as Bitcoin, Ethereum, Bitcoin Cash, Ripple, IOTA, Litecoin, and Dash. Contact Page.

FYI By the time I finished this article, Bitcoin was trading at $14,839.75 at 11:29 PM.

Net Unrealized Appreciation Q & A

Net Unrealized Appreciation Q & A… And… Comments…

COMMENT: When considering an NUA, an important consideration aside from whether you qualify, is whether you are disqualified. For example, you are allowed only one distribution in the year of the NUA lump-sum distribution. Accordingly, a loan can disqualify you. Furthermore, you should consider when to make the lump-sum distribution. For example, assuming you retire in the beginning of the year, say Jan 2, 2018, or the next day back to work, you would potentially have all of 2018 and all of 2019 to take the distribution. So if you had a disqualifying event in 2018, you could potentially wait until 2019 to take the distribution. With that being said, its also important to note that the NUA rules permit you to allocate which company stock you’d like to distribute to the taxable brokerage account and which you’d like to rollover with the other assets to the IRA. So it’s worth considering if it makes sense to retain some of the stock. Finally, consider your options as to how and why you should liquidate the NUA stock after you’ve distributed it. Many people don’t realize that there are three capital gains rates: 0% 15% and 20% and that the NUA avoids the Net Investment Income Tax of 3.8% NIIT. So your TOTAL income determines your capital gains tax bracket–Not just your capital gains sales. Also, you could consider whether liquidating other stock from the account could offset some of the gains. Please seek tax advice and have a professional tax advisor consider your options.

Q: If the company is being acquired in a cash deal, would that qualify as a triggering event, AND, should the lump sum distribution occur before the acquisition? In this case, separation of service occurred in 2016, participant is age 55, and has kept the 401k with former employer, which is now being acquired.

A: Hi, let me preface that tax counsel should be sought but generally: The triggering events are (a) Death, (b) Disability, (c) Separation from Service, or (d) Reaching age 59 ½. Notably, this means that an in-service distribution generally does not qualify for NUA treatment, unless it is a distribution that also happens to occur after a triggering event (e.g., upon reaching age 59 ½). So perhaps the acquisition is not a triggering event, generally speaking. I am not aware of any authority for that. So if the separation occurred in 2016, the person would have until the end of the subsequent tax year 2017 to make the NUA distribution. The problem I’ve encountered with clients like this is they’ve taken a distribution in the current year, which could make them ineligible. If the client made a distribution in the prior year, they might still be eligible, as long as no distribution in the current year. Loans also make them ineligible. So the caution and big warning is make sure you seek tax counsel to determine whether the client is eligible. Ive had scenarios where we had to unwind an NUA, which I know how to do, but that’s beyond the scope of the article.

Q: In regard to the “entire balance in a single tax year lump sum” requirement, would an in-service distribution to an IRA at age 59-1/2 affect the ability to use NUA treatment of company stock at age 65 retirement?

A: Hi, if you qualify and make the distribution, bear in mind you need to make a lump sum distribution. So you would be effectively liquidating your 401k. Thus, I had a client go back to the same firm after retiring. The question raised was whether he would be eligible for the NUA a second time and I believe I opined yes, but I’d recommend retaining tax counsel. In other words, I see no reason why not but I’d have to see the mechanics of it, because right now it’s a pure hypothetical exam question. The warning I routinely give is — it’s not only whether you qualify for the NUA, it’s really whether you have something that disqualifies you. Good luck.

Q: I have to start taking RMD this year and am planning to rollover my 401K into an IRA. Say I rollover everything in my 401K to an IRA except for the company stock which I transfer in kind to a brokerage account. I must pay ordinary income tax on the RMD AND on the cost basis of the company stock. Every year going forward, I must pay ordinary tax on the RMD and any time I sell some of that company stock, I would have to pay long-term capital gains tax on that sale. Which sounds like double taxation to me. The longer I hold that company stock, or the more slowly I sell shares to limit the tax consequences, the more I’m locked into a stock position that may not be advantageous. If I sell the stock all at once outside the IRA, there’s a huge capital tax gains on top of the RMD. I just don’t see the advantage.

A: The NUA would count as an MRD. You may not be grasping the concept. An example to help. If the FMV of the stock is $20–assume you pay as much as 39.6%, or ($8) tax on every share if you do not do an NUA. If your basis in the stock is $12, you pay 39.6%, or ($4.80) on the basis of $12, and pay 0%, 15%, or 20% or ($0, $1.20, $1.60) tax, on the NUA part of $8. So would you rather pay tax of ($8) or ($5.40) per share of tax in this scenario? Obviously you’d like to pay less so you would choose an NUA. Now multiply that by 100 shares, 1,000 shares, 10,000 shares. You save $2 bucks/share in taxes x 10,000=that’s $20,000! To determine whether or not to sell the stock, that decision should be made jointly with the financial adviser. Please immediately seek tax counsel as if your financial future depended on it! Good luck and great questions.

COMMENT: A Minimum Required Distribution (MRD) often called a Required Minimum Distribution or RMD is a mandatory distribution from an IRA at 70 1/2 years of age. If you are eligible for the NUA and it makes financial sense and tax sense, and you’ve had tax counsel model your tax exposure and discussed it with your family, then the distribution of the NUA stock counts as an MRD or RMD at its fair market value, FMV, except you only have to pay tax on the basis of the NUA stock, not its FMV. If the FMV of the NUA stock is insufficient to satisfy your MRD for the year (which by the way you must have one heck of a large retirement account like Mitt Romney’s $100,000,000.00 IRA) then you could satisfy the balance of the MRD by taking a taxable distribution from the newly rolled-over IRA. You would pay ordinary tax. The alternative is not to do an NUA and roll the whole 401k to an IRA. In this case you would pay ordinary income on the entire MRD. So isn’t it clear how you save money with the NUA? You pay ordinary income only on the basis and pay long term capital gains rates, 0% 15% or 20% on the NUA and avoid the 3.8% NIIT if applicable to you. So what happens is if the basis of the stock is say $12 and the FMV is $20, then the NUA is the difference or $8, which is taxed at long term capital gains not ordinary tax rates. The taxes on the NUA are simply deferred until you sell the stock. Please seek tax counsel so you can have your personal situation explained to you. I usually prepare a financial model to show you how much tax you would pay in both scenarios so you understand. As such I recommend you do this.

Q: The stock transfer does not count as an RMD. I still have to take the RMD, pay taxes on it AND pay taxes on the cost basis of the stock. Going forward, every year I must pay taxes on the RMD and, if I sell any of the stock, taxes on the capital gains. If I convert the entire 401K, including stock, into the IRA, I pay taxes on the RMD every year. But there are no taxes on capital gains because there is no stock in a brokerage account. In other words, in Case I, I am paying taxes on both the RMD and the stock and every time I sell the stock I pay taxes on it. In Case 2, I simply pay taxes on the RMD. “Double taxation” is perhaps the wrong way to describe this. What I see is that I will end up paying more taxes by using the NUA as well as put myself at a long-term risk from ownership of the company stock which is too high for my comfort. Selling the stock all at once in the brokerage account, as many sites suggest, would result in a huge tax bill. If I needed the cash, it might make sense, or if I were 40 years old, the NUA might make sense. But I don’t see how it makes sense for somebody who is required by law to take an annual RMD when they do they 401K->IRA rollover. I’m truly not trying to be argumentative for the sake of argument. I’ve got to decide what to do in the next month, and I need to understand the NUA to make the right decision.

A: In addition to my other contributions below, I wanted to add one VERY IMPORTANT point to paragraph (2) The Employer retirement plan must make a ‘lump sum distribution’ in a single tax year…a plan participant may NOT have any other distributions from the plan during that year or it would likely disqualify the NUA special treatment. Traps: a partial distribution earlier in the year, or even a loan. This would not be a non-lump sum distribution during a single tax year, even if the NUA lump sum distribution was attempted later in the year. Be wary of this point and seek tax advice immediately.

Q: I have a question related to RMDs. It is my understanding that you can use the market value of the stock to satisfy the RMD, but still only have the cost basis as the taxable amount of the distribution. So, $2 million 401k, around $73,000 RMD. Company stock market value in 401, $65,000, cost basis $10,000. I do NUA plus $8,000 and my RMD is satisfied, but the taxable amount comes to $18,000. Is this correct?

A: You are getting into a level of genius that warrants applause. If this strategy works, you effectively satisfy a required minimum distribution requirement, while deferring the recognition of income, and with the NUA, you are also deferring and reducing your tax rates. Bravo.

Q: Can you sell high cost basis shares in the 401k, diversify those proceeds and then roll out the remaining low cost basis shares into a taxable account and roll over the remainder to an IRA?

A: Yes, generally speaking, one could liquidate shares prior to the NUA rollover, or one could simply roll-over the account to an IRA and do it there. I suggest you speak to a tax advisor.

Q: However, there is a step-up on death for any appreciation that occurs after the date of NUA. Shouldn’t that have been calculated into some of your analysis?

A: Usually people separate in the beginning of their retirement, but it is possible to separate for health reasons. In my mind, the step-up in basis is a bonus to the NUA, as otherwise an heir would inherit an IRA subject to ordinary tax rates. So if the NUA was viable to begin with, then perhaps to the extent the NUA is not subject to tax, it’s truly a tax-free gift. –ADDED: The article indicates that the NUA is “not eligible for step-up in basis at death…” in the paragraph before example 2 (citing Rev.Rul.75-125). In Rev.Rul.75-125, a decedent died holding company NUA gain stock in his qualified retirement plan. His widow elected the NUA and subsequently sold the stock. As a result, she was not entitled to step up in basis. However, there’s nothing in my research to suggest that the NUA once performed in life, would not receive step up in basis post death. So I wanted to clarify that point.

Q: Do you know if you can allocate after-tax money directly to the cost basis? For example, if you had a $2mil IRA with $1mil of NUA stock (cost basis $200k). If there was $100k of after-tax dollars, could you roll $1mil to an IRA, do a transfer of stock to a taxable account for the remaining $1mil and only pay tax on $100k ($200k less $100k basis)?

A: Yes, I believe this is an option if you qualify. Otherwise you could go with rolling it to a Roth if that benefits you. If not, then use the money to pay the NUA bill. Brilliant. Seek tax counsel to ensure you qualify.

Q: Any thoughts on how the company must calculate basis? Someone below mentioned using average basis, but is it really as simple as the stock purchase price? I thought I had read a while back that employers used a formula of some kind.

A: The plan administrator of the 401(k) or ESOP or LESOP will calculate your basis for you. If it does not then it is possible to recalculate, and I’ve done it by using prior statements or pay stubs. But it takes a long time because I had to go through every statement over the course of many years.

Q: if this is a private company (and about 90% of ESOPs are private companies), how does the in-kind stock transfer work? Will a brokerage accept private stock? And wouldn’t there have to be a repurchase agreement with the company on these shares?

A: Technically speaking, most custodians may not accept private stock unless conditions are met but you could ask them. You may not be required to distribute the NUA stock to an account per se, you could simply hold them in bearer form for example. As far as a repurchase agreement, that’s not a requirement that I am aware of. Please seek tax counsel and speak with the ESOP trustee. It is the Trustee who could provide the stock basis and report the NUA on a 1099-R to the IRS.

Q: What are your thoughts on the “Frank Duke Method” of NUA distributions? (Frank Duke was a former P&G exec that implemented an approach whereby at the end of the day through a series of transactions (exchanges from Preferred Stock to Common Stock etc.) a high basis is allocated to stock rolled out to the employee and the remaining shares without basis are rolled into an IRA.)

A: My thought on the Frank Duke method was it’s brilliant. Essentially it involves changing the accounting method of the NUA stock from, say for example, “FIFO” First In First Out, to either specific identification, or weighted average. So by changing the accounting method, you can effectively change the basis of the individual shares of stock. In other words, if you have a basket of stock that was purchased during rising stock prices, the stock purchased later has a higher basis. By changing the accounting method, you can say that the first share sold is the low basis stock. And obviously, the stock is then distributed in part to the taxable account and part to the IRA, with different basis. So this works when there are baskets of stock and multiple purchase prices. Keep the high basis stock in the IRA because you’re not getting much benefit from the NUA. Roll out the low basis stock. So it’s obviously brilliant. I have helped clients do this in the context of charitable giving, so it’s certainly possible with the NUA. I would recommend hiring tax counsel though.

Q: Would the NUA option be more attractive if someone plans to make annual charitable contributions throughout their retirement years? I’m thinking it might make sense to take an NUA-eligible distribution and then donate a portion of the shares to charity each year, with the assumption that the charity would get the full value of the shares at the time they were donated and donor wouldn’t owe any capital gains tax on them. What about another possibility: Could the entire NUA-eligible distribution be donated to a donor advised fund (after the shares were placed in a brokerage account) without incurring any capital gains tax?

A: If someone asked me this I would ask them to consider a QCD Qualified Charitable Distribution, which also satisfies your required minimum distribution RMD. Perhaps its feasible to pay tax on the NUA and subsequently donate the appreciated shares in-kind taking a schedule A charitable deduction. A financial analysis should be done to determine the tax efficiency versus a QCD.

Q: I have 4 questions. please help me understand? (1) What happens to NUA if stocks are still in 401K plan and the company is acquired by another company with 50% cash and 50% stock deal? Does opportunity for NUA goes away? (2) How cost basis and taxes would be reported if after NUA transaction(in-kind transfer), the current stock is acquired by 50%cash and 50% stock deal with a new company. Do you loose the long term cap g/l tax advantage? (3) After the NUA transaction, isn’t you cost basis for the transferred stocks in brokerage account = o since you have already paid ordinary taxes on the cost basis? (4) I don’t understand the crossover/breakeven point graph. Why rollover IRA (with cost basis of say 10% and 62 years of age employee) ever overtake the NUA distribution assuming same investment assumptions.

A: 1)    What happens to NUA if stocks are still in 401K plan and the company is acquired by another company with 50% cash and 50% stock deal? Does opportunity for NUA goes away? It depends. If you make a distribution before the transaction, then perhaps the NUA can be completed. The other consideration is whether the new stock is employer stock? Is the employee employed by this new company? If you do not make the distribution, then the question is whether you still qualify for the NUA and if it is employer stock. (2)       How cost basis and taxes would be reported if after NUA transaction(in-kind transfer), the current stock is acquired by 50%cash and 50% stock deal with a new company. Do you loose the long term cap g/l tax advantage? The custodian tracks the basis in the 401(k). But it can be re-calculated if needed and I have done it. (3) After the NUA transaction, isn’t your cost basis for the transferred stocks in brokerage account = o since you have already paid ordinary taxes on the cost basis? After the NUA, the cost basis of the stock is the same as the cost basis of the stock held in the 401(k). The cost basis does not change because of the distribution. (4) I don’t understand the crossover/breakeven point graph. Why rollover IRA (with cost basis of say 10% and 62 years of age employee) ever overtake the NUA distribution assuming same investment assumptions. This is because of appreciation of the stock, and the avoidance of capital gains taxes in the 401(k) and IRA accounts. They are tax deferred and do not pay capital gains taxes.

A: Firstly, your custodian should be able to tell you whether you have n u a stock in your account. However, your custodian or financial advisor is not going to be able to tell you the tax consequences of that transaction. In order to determine the tax consequences, someone needs to look at your prior-year return and forecast your current or expected income to determine the implications for tax purposes of an Nua rollover. Another important thing to consider about the NUA strategy is that although you may qualify, its important to make sure you don’t have a disqualifying event, such as a distribution or a loan from your 401k. As such, aside from analyzing the factors that qualify you, take a look at the tax implications of the lump sum distribution, how the distribution of the Nua stock is going to affect your taxes, and how much tax you’re going to owe in the current year. In addition, you need to know when to make your estimated tax payment. Furthermore, you should know what to expect from the custodian by way of documentation of the Nua stock. Moreover, you should be fully aware of the basis, or the purchase price of your Nua stock. The basis is important as is the accounting method by which you account for your transaction for income tax purposes. This means are you using first in first out, last in first out, specific identification, or weighted average methods. You should consider the consequences of selling all of your NUA stock, and distributing only part of your NUA stock to a taxable account, while rolling over the remainder to an IRA. If you choose this, you’re going to need to decide which lot of the stock you should roll over, if it benefits you to do so. In this regard, you can choose which accounting method to use that best suits you for the transaction. In conclusion you should also have some level of assurance from your tax consultant or Tax Advisor that would help you in the event the IRS chooses to examine your return or has questions about your Nua transaction.

Q: I am recently retired (at 76) and have a large amount of company stock in my 401k. Half has substantial gain (good for NUA) and half is near market value. Do I need to take all out to a non-Ira account or can I take only the portion that is relevant to NUA? I do not intend to sell the stock. In addition do I need to take a total rollover of all funds at the same time that I take the stock? I also have to take a required distribution.

A: I would advise a client that legally speaking, the IRS allows the basis of the stock to be allocated among the shares, so that you can distribute NUA stock in lots, as you see fit. But you would need a CPA such as myself to sign off on it, as well as the fact that you would need to be eligible for the lump sum distribution and otherwise not disqualified, as it needed to be done within 1-calendar-year following the triggering event. But if I understand your question, it is possible with the right support team. Also, under Treasury Regulations the NUA distribution counts as a Minimum Required Distribution for the Fair Market Value, not just the cost basis of the stock distributed in the lump-sum distribution/rollover. This is not advice, but rather a suggestion that you seek counsel.

Q: I am just over 70.5 years. I have executed a LSD from my company 401K including taking advantage of an NUA to pull out company shares and satisfy the RMD. The shares have transferred from the 401K to the share holding company. The shares are registered to my name as individual (because the 401K was only in my name – with my wife as beneficiary). Is it wise and acceptable to re-register the shares as Joint Tenant with Right of Survivorship? Will re-registering violate any rules of the NUA?

A: I would advise the client to seek a legal opinion as it may depend upon whether you reside in a community property state and what your estate plan calls for. You can’t re-register the ownership of your new IRA; you only may name a beneficiary. When you re-title your taxable financial account holding the NUA gain stock, you presumptively make a gift of the shares to all those on the title. The value of the account has significance, as does your estate picture. It also may be a factor as to whether you are married filing jointly or married filing separately. Your tax consequence could change. Under Federal tax law, you can generally give an unlimited amount to your spouse. But as far as tax consequence, under a hypothetical scenario, gifting to your spouse generally has no tax consequence as far as gift taxes. Please seek a qualified tax and legal counsel.

Q: I am going to sell NUA stock I have had for 2 months. Can I claim a capital gains loss since the stock has dropped $6 per share. I know any gain since the distribution would be taxed as short term gain. But no website I have read ever mentions the reverse in their discussion.

A: Without providing direct advice, understand the general rules: upon the distribution of the NUA stock in a lump sum rollover, the basis of the stock is included in your ordinary income plus any applicable early withdraw penalty 10%. The Net Unrealized Appreciation is the difference between the basis and the Fair Market Value of the Stock at the date of the distribution. No matter when the stock was actually purchased, that part is ALWAYS long-term capital gain. Any subsequent gain is treated as a capital gain with the holding period beginning on the date of the distribution. So subsequent gains are treated as short term unless they are held for a year of more from the date of distribution. If the stock had a basis of $1, and had a FMV of $10 when distributed (NUA of $9), then if the stock went to $6, then the NUA would be $5. If on the other hand, the stock dropped below its basis to $0.50, then you would have a long-term capital loss of $0.50. This is precisely why people should engage a professional to analyze these matters prior to entering the transaction to see if it makes sense from all angles to do the transaction. I am sorry you did not have a good experience, if can be of help to you I would gladly assist. Good Luck!

COMMENT: First, the client must qualify in the fact that he or she is with 1 tax year of the qualifying event. Further, the client can’t have made loans or distributions from the account. Third, the client needs to analyze the tax consequence and make sure he or she has the funds available to pay for the NUA. Estimated tax payments need to be made, timely. Should the client be diversifying out of the stock position entirely? Also, is this an opportunity to utilize a charitable giving strategy. The client should not attempt an NUA without first retaining tax counsel to determine if the NUA makes sense.

50 Year-End Business Tax Savings Tips

50 Year-End Business Tax Savings Tips

  1. Set aside time to plan

Book an appointment in your calendar to work on you and your company’s year-end items. For example, you could block off an entire day or you could enter multiple 1-hour appointments over the course of a week or two. Weekends are usually packed with personal appointments and family time. In any case, you should ensure that you have ample time to complete your analysis prior to the deadline of December 31.

  1. Dissolve an unused Company (LLC or Corporation)

Do you have an unused company, such as an LLC or Corp? It might benefit you to dissolve it before the New Year. You could close its tax year by December 31. It wouldn’t have to file any future tax returns beyond the final return. It also would avoid state income taxes. Finally, it would avoid the annual report requirement and fees. Be sure to cease all business in the company name and close all company bank accounts. You can easily dissolve it by visiting www.sunbiz.org.

  1. Incorporate This Year

There is time to form a new entity and have it registered for the 2017 year. You may want to do this to ensure you acquire the name of your choice.

  1. Employee Gifts and Bonuses

Hopefully the business has had a good year and the staff earned its bonuses. It is not necessary to give employees Christmas or End-of-the-Year bonuses. It is entirely voluntary. If you give a food item, it is not income to the employee, but the cost is deductible to your business. However, any non-food gift is just the opposite. While the business still gets a deduction, the value is income to the employee and has to go on his or her Form W-2 at the end of the year. You cannot give a Form 1099. You also must pay social security taxes, Medicare taxes, and make federal withholding. Depending on the employee’s annual salary, you probably should withhold 25%, 28%, or 33%, or more.

  1. Gather prior years’ returns

In preparation for the business’s annual income tax filings, assemble the prior years’ returns. They will serve as a handy starting point for the current year’s tax return. They also should be reviewed

  1. Check Social Security Numbers, EIN numbers, and Correct name spelling

It is a good idea to verify social security numbers and addresses in December. You will need these for your Forms W-2 and 1099. Ask your employees and vendors to check for accuracy when you make your December payments to them.

  1. Business Gifts

Businesses can give gifts to customers, clients, or vendors. However, its deduction is limited to the first $25.00 per person or entity. The rules are completely different than for employee gifts. There is no special deal for food items.

  1. Ending Payroll on December 31

Many businesses want to end payroll on December 31. It is not necessary to do that. If you pay weekly, you can just do a regular payroll for the prior week, and the rest of the hours worked in December can be paid in January. Nevertheless, for those of you who want an exact cut-off, here are the rules: The paycheck must be dated in the current year. It also must be available for employees to pick up before the end of the year. You do not have to actually put it in their hands, and employees do not have to actually pick up their checks or deposit their checks, but paychecks must be available for employees to pick up if they want. If you normally mail paychecks, they must be postmarked by December 31.  If you use direct deposit, instead of paper checks, the funds must be put into employees’ bank accounts by December 31.

  1. Accelerate or Defer Income and Expenses

If your business had a good year, you may want to try to accelerate some expenses to reduce your tax liability in the current year. If revenues were lower, you may want to consider accelerating revenue (income). You should speak with your tax advisor on how to do this.

  1. Review the financial health of your business.

You should compare your revenue, expenses, and pre-tax income, year-over-year. This means 2017 versus 2016 and 2015. To make proper evaluations, you’ll need to evaluate whether the current accounting system is sufficient.

  1. Review your Financials and Record keeping System

Has your business graduated from spreadsheets to QuickBooks onward? You should consider whether your current system adequately reports your financial performance to permit you to make decisions.

  1. Review your personal and company retirement plans

Your business may have numerous retirement plan options. This includes a 401(k) or SEP-IRA. Make sure you understand how each works and the tax advantages and disadvantages. Furthermore, should your business consider and ESOP, or another employee benefit plan? ESOPs can allow the business employees to own a percentage of the stock as part of their retirement. The business owner also could get a tax deduction for selling his or her stock to the employees.

  1. Make an inventory list of products, supplies, and equipment

It would most certainly benefit any business to have inventory numbers as part of its ongoing operations. However, some businesses rely on sales data, but do not conduct physical counts. It might be a good idea to conduct a physical inventory count for several reasons. Also, the business could count its supplies and equipment. You may want to take photographs for insurance purposes and evaluate the condition of the equipment. You should compare your results to your balance sheet.

Consider the implications of cancellation of debt (COD) income on taxable income. Cancelation of debt owed to another is considered income to the debtor in many cases. It may depend on whether the debt was recourse or not, and whether property securing the debt was collecting.

  1. Review your insurance policies

You may have several insurance policies including business liability, professional malpractice, Errors & Omissions, Notary Public insurance, completion bonds, workers’ compensation, life insurance, disability insurance health insurance, premises liability insurance, auto insurance etc. You should review your coverages and limits of liability to ensure you are adequately covered. It may be possible to hire an independent person to complete a study that you could use to lower your premium. Additionally, you should check to see whether your insurance policies cover data theft and destruction of data.

  1. Compliance

Check to make sure you follow applicable laws and regulations. For example, many industries are required to deliver privacy policies on how customer data is used. Furthermore, the Fair Debt Collection Practices Act mandates how customers can be contacted for collections. However, the FDCPA may not be applicable to you.

  1. Write off Bad Debts

Nearly every business has accounts that can’t be collected for many reasons. You should be monitoring your accounts receivable and collecting or referring the accounts to collections. If the account cannot be collected and you booked it as revenue, the consider writing it off. This does not apply to cash basis taxpayers.

  1. Consider disposing of a passive activity

Consider disposing of passive activities to reduce taxable income if doing so will allow you to deduct suspended passive activity losses.

  1. Consider whether you need to increase your basis

Consider whether you need to increase your basis if you own an interest in a partnership or S corporation, so you can deduct a loss from it for this year.

  1. Consider Bonus Depreciation

Consider making expenditures that qualify for the business property expensing option. For 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is available for most depreciable property (not buildings), off-the-shelf computer software, and qualified real property qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The expensing deduction is not prorated for the time the asset is in service during the year.

Consider whether you’re eligible for expenditures that qualify for 50 percent bonus first-year depreciation if bought and placed in service this year. This bonus depreciation includes: Qualified reuse and recycling property; Qualified second generation biofuel plant property; Certain qualified property placed in service before January 1, 2020; and Certain plants bearing fruits and nuts.

  1. Take advantage of the de Minimis safe harbor election.

The so-called book-tax conformity election enables you to expense the costs of lower-cost assets and materials and supplies. To qualify for the election, the cost of a unit of property can be as high as $5,000 with an applicable financial statement. If not, the cost of a unit of property can’t exceed $2,500.

  1. Defer Income

Consider deferring income until next year if doing so will reduce you company’s tax liability.

  1. Accelerate Income

Accelerate income to create a small amount of net income. A corporation that anticipates a small net operating loss may find it worthwhile to accelerate just enough of its income, or to defer just enough of its 2016 deductions, to create a small amount of net income. This will permit the corporation to base its future estimated tax installments on the relatively small amount of income, rather than having to pay estimated taxes based on 100 percent of its future taxable income.

  1. Buy Needed Equipment

Write off business purchases for your taxes. Buying needed equipment this year and putting it to use reduces your taxes by creating expenses.

  1. Pay Bills Early

For cash-basis taxpayers, and in certain cases for accrual-based taxpayers, business-related bills such as rent, telecommunications, and utilities become deductions when paid.

  1. Make an S-Corp Election

The S-Corp election changes your entity’s classification from either a disregarded entity or a corporation. This election may reduce your future tax liability.

  1. Review entity choice

Determine whether your company is a pass-through entity or separately taxable entity for federal income tax purposes. Then consider whether operating as a different entity could reduce your tax liability. In some cases, it’s as simple as filing an election. In other cases, you may need to form a new entity.

  1. Evaluate accounting methods

If your company is eligible for either cash or accrual accounting, consider whether changing accounting methods would provide a tax savings. Normally, cash method produces greater income deferral. The accrual method could be better if accrued expenses tend to be higher than its accrued income.

  1. Claim the manufacturers deduction

This deduction isn’t just for manufacturers, so don’t overlook it. It is commonly referred to as the Section 199 or domestic production activities deduction. It allows a deduction of up to 9% of income from qualified production activities. These include many activities associated with constructing or substantially renovating real property located in the US.

  1. Make Deductible Contributions to charity

Charitable contributions can reduce taxable income.  There are many factors to consider such as your income, the amount of the deduction, whether the deduction is limited, and whether you should give property like appreciated stock or a used automobile directly to the charity

  1. Sell investment losses to offset capital gains

Consider selling investments that have declined in value to offset corresponding gains. You would need to consider your tax bracket, whether the investments are passive, the amount of the losses versus gains, and whether you have carryforwards.

  1. Consult your professionals and tax advisors

Rather than waiting until after December 31 to discuss what taxes you might owe, speak to your advisors now so that he or she can advise you on what steps to take to minimize taxes before the year passes and it is too late. Consider your strategies as part of the whole picture versus in a vacuum. Don’t simply consider taxes. Consider whether, for example, it might make sense to continue to hold a stock before selling it. Speak to your attorney as well for a year-end checkup.

  1. Consider whether your current Advisors meet your needs

If you are self-preparing your tax returns, consider hiring a professional. You may have outgrown your current advisor. If your professional serves a certain market, and you’re just too big, don’t let loyalty get in the way of progress. At least consider consulting with another advisor and seeing if he or she will work with your existing advisor.

  1. Get Your Bookkeeping Finished in December

Part of your year-end tax strategy is to have a good understanding of your company’s financial health. Focus on getting your books up-to-date and accurate. Schedule time with your CPA for year-end advice. If your books are a mess, be sure to contact us to help you get them in order.

  1. Inventory Write-Offs

Depending on your accounting process, you may wish to check inventory for goods that have been damaged or have become obsolete.

  1. Review your accounting methods

There are many different methods for recognizing income and expenses. Public companies employ numerous accounting methods. Conduct a comprehensive review of your accounting methods. Identifying a more favorable method can allow you to accelerate a deduction while rates are high and defer income into a future year when rates might be lower.

  1. Cost Segregation Studies

Buildings are depreciated over 29 or 39 years. An opportunity for tax savings might be found by identifying and reclassifying building assets that can be depreciated using shorter lives. A cost segregation study can often identify scores of building components that can be segregated and depreciated sooner.

  1. Deduct bonuses before the year-end

If the tax law changes next year, then consider paying bonuses to help reduce income and correspondingly taxes in the current year.

  1. Review sales and use taxes for missing refunds

It is entirely possible that you’ve paid sales tax on items that are non-taxable. Review the categories of items you purchase against sales tax exemptions. If’ you’ve already paid the tax, it may be possible to claim a refund.

  1. Review your property taxes

This includes real and personal property taxes. Your property tax valuations are based on assessed values. The property appraiser may have raised those values in the past year. So, you’ll need to make a timely assessment to contest the values.

  1. Perform a reasonable compensation study

If you own a corporation and work in the business, you may be required to pay a salary to yourself. A reasonable compensation analysis can confirm your salary meets IRS standards.

  1. Consider alternatives to equity pay for key employees

A phantom stock plans credits employees with stock units that represent a share of the firm’s stock. Those stock plans promise to pay the employee the equivalent of stock value in the future. Performance-based cash payment plans promise employees cash bonuses if performance goals are met.

  1. Purchase a car or truck

Purchasing a car or truck for business use can permit a deduction that can reduce your taxes.

  1. Contribute to a Retirement Plan

Make payments to a retirement plan or set one up before the year-end to reduce your income for the year.

  1. Disaster relief

Hurricanes and natural disasters unfortunately leave devastation in their paths. The Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides additional relief. Personal casualty losses need not exceed 10% of AGI to qualify for a deduction. The Act also eliminates the current law requirement that taxpayers must itemize deductions to access this tax relief—it does so by increasing an individual taxpayer’s standard deduction under Code Sec. 63(c) by the net disaster loss. The portion of the standard deduction attributable to the net disaster loss is also allowed for alternative minimum tax (AMT) purposes. The Act increases the $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses. The Act allows victims to make qualified hurricane distributions from their retirement plans of up to $100,000.

  1. Clean up your chart of accounts

If you have too many accounts or too many vendors in your chart of accounts and vendor lists, year-end is an excellent time to remove unused ones. Creating false vendors is also a source of fraud. So, look for suspicious activity such as recent payments to vendors who have not done work in a while, or names of vendors or employees you don’t recognize.

  1. Scan Unused Documents

Eliminate documents in accordance with your record retention policies. Also, consider scanning important documents, or eliminating documents altogether. Conversely, consider maintaining paper files in cases where digital records are insufficient.

  1. Review your email policies

A corporate hack can significantly interrupt business operations and can put personal and business identities and reputations at risk. Consider implementing and updating your email policies about visiting known and trusted websites, downloading software, and clicking on links in emails.

  1. Ensure employee files have I-9 Forms and updated W-4 withholding certificates

Ensure that you have the required documentation from the Department of Labor for each employee. This includes an I-9 and W-4 Withholding certificate. W-4s should be updated annually.

  1. Make sure your company officers are in tax compliance

This seems obvious, but know that in the event of an audit, the IRS has the right to request the tax returns of highly compensated individuals and company executives.

  1. Exercise Caution

Year-end tax planning must consider a business’s situation and planning goals.

Season greetings!


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