HOW EMPLOYERS CAN CALCULATE NONDEDUCTIBLE EMPLOYEE PARKING EXPENSES, AND POSSIBLY REDUCE THEM BY MARCH 31, 2019

Background

Employer business deductions for qualified transportation fringes ended in 2018. The 2017 tax reform known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, amended Sec. 274(a)(4) by eliminating employer business deductions for employee[1] qualified transportation fringe (QTF) benefit expenses, including qualified parking[2], mass transit and van pool benefits (although such benefits continue to be excluded from employee income).

Increased cost for tax exempt employers started in 2018. TCJA also amended Sec. 512(a)(7) to require tax exempt employers to increase their unrelated business taxable income (UBTI) for such QTF expenses.

How to calculate employee parking expenses was unclear. These changes were effective for amounts paid or incurred after December 31, 2017, but TCJA did not explain how to determine the amount that is nondeductible or treated as an increase in UBTI. Although the IRS intends to propose regulations under Sec. 274(a)(4) and 512(a)(7) (and under Sec. 6012 for tax exempt employers’ related filing requirements), in the interim, the IRS recently issued Notice 2018-99 (December 10, 2018), providing limited guidance on how to calculate nondeductible parking expenses. Employers may rely on Notice 2018-99 until further guidance is issued.

For simplicity, in this article, we’ll use “nondeductible parking expenses” which tax exempt employers should read to include UBTI increases, since the new UBTI inclusion rules for tax-exempt organizations generally mirror the new Sec. 274(a)(4) rules. But tax exempt employers should also note that in Notice 2018-100, the IRS provided relief from the estimated tax penalty in 2018 for parking QTF benefits for entities that were not previously required to file a Form 990-T or that will not exceed the $1,000 threshold below which a tax exempt organization is not required to file a Form 990-T or pay UBIT.


IRS guidance and transition relief

How to determine an employer’s nondeductible parking expense depends on whether the employer owns (or leases) the parking facility or pays a third party for employee parking. 
Importantly, Notice 2018-99 says that employers who own or lease parking facilities that have “reserved” parking spaces for employees have until March 31, 2019, to reduce the reserved employee spaces to qualify for the “general public” parking exception to the nondeductible employee parking rules (discussed below). If that change is timely made, the IRS will treat the change as being in effect since January 1, 2018. 


Employers who use third party parking areas

If the employer pays a third party (either directly or through reimbursement) for employee parking, the amount of the nondeductible parking expense is fairly straightforward. It is the lesser of (i) the employer’s total annual cost of employee parking paid to the third party; or (ii) the Sec. 132(f)(2) monthly per employee parking limit (i.e., $260 for 2018; $265 for 2019). If an employer pays more than the Sec. 132(f)(2) limit, the excess is treated as employee wages (and therefore, the excess is deductible as compensation and is not subject to the Sec. 274(a)(4) disallowance). The calculation of the nondeductible expense is more complicated for employers who own or lease employee parking areas.


Employers who own/lease parking areas

Safe harbor. According to the Notice, until further guidance is issued, employers who own employee parking areas or have a property lease that includes employee parking may use any reasonable method to calculate nondeductible employee parking expenses. But the Notice deems a four-step safe harbor method (described below) to be a “reasonable method” for determining the nondeductible expense amount. The Notice also includes eight examples of how the safe harbor methodology applies to both for-profit and tax exempt employers, as well as two additional examples for tax exempt employers.

Step 1. Calculate the disallowance for reserved employee spotsIf the parking facility owned or leased by the employer has a reserved area for employee parking but also has other parking areas, the employer must determine the percentage of the reserved employee spots compared to total parking spots, then multiply that percentage to the total parking area expenses. The employer would then subtract the nondeductible amount for reserved employee parking from the total expenses in Step 3 below.

For tax years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots cannot be a reasonable method. But until March 31, 2019, employers can change their signage, access, etc. to decrease or eliminate reserved employee spots and the IRS will disregard them as reserved employee spots retroactively to January 1, 2018.

Step 2. Determine the primary use of remaining spots (the “primary use test”). Employers should next determine if greater than 50 percent of the unreserved parking spots are available for the general public (even if not actually used).  If the primary use of the remaining parking spots is for the general public, the remaining parking expenses remain deductible.  If the unreserved parking spots are not primarily for the general public, see step 3 below.

“General public” includes (but is not limited to), customers, clients, visitors, individuals delivering goods or services, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The general public does not include the employer’s employees, partners or independent contractors.

“Primary use” is tested during normal business hours on a typical work day. Employers can use any reasonable method to determine average or estimated usage of the parking spots if such usage varies significantly between days of the week or times of the year.

​​Step 3. Calculate the allowance for reserved nonemployee spots (if any). Employers who reserve parking spots for designated nonemployees — such as visitors, customers or partners, sole proprietors, or 2-percent shareholders of S-corporations — will need to determine the percentage of such parking spots (if any) in relation to the remaining total parking spots. The employer would then multiply that percentage by the employer’s remaining total parking expenses after subtracting the nondeductible amount determined in Step 1. The result is the amount of the employer’s allowable deduction for the remaining total parking expenses.

Step 4. Determine remaining use and allocable expenses. Employers who have remaining parking expenses that are not specifically categorized as deductible or nondeductible under Steps 1-3 above must allocate those expenses based on the employer’s reasonable determination of employee usage of such parking areas during normal work hours on a typical business day. Employers can identify the number of employee parking spots based on actual or estimated usage, taking into account the number of spots, number of employees, hours of use and other factors.

FAQs for Calculating Expenses

The Notice also answers some commonly asked questions about to how to calculate the amount of nondeductible employee parking expenses.

1. What counts as an expense? The Notice clarifies which costs can or cannot be included as an employee parking expense. Expenses are based on employer cost, not “value” — so employers can’t simply use fair market value because Sec. 274(a)(4) disallows a deduction for the expense of providing a QTF (regardless of its value). For example, depreciation cannot be included as a parking expense because it is not an actual “paid” expense (since depreciation simply recovers the original investment). 
Also, expenses paid for items not located on or in the parking facility — including items related to property next to the parking facility, such as landscaping or lighting — are not included.

Permissible expenses include (but aren’t limited to) rent or lease payments, insurance, property taxes, interest, utility costs, repairs and maintenance, cleaning, removal of snow, ice, leaves and trash, parking lot attendant expenses and security costs. 

2. What if the employer has multiple parking areas? According to the Notice, if an employer owns or leases more than one parking facility in a single geographic location, the employer may aggregate the number of parking spots when calculating nondeductible parking expenses. But if the employer owns or leases parking facilities in more than one geographic location, the employer may not aggregate those parking spaces.


Other laws still apply

Regardless of these changes in federal tax law, keep in mind that employers must continue to comply with local laws regarding commuter benefits — for example, in New York City and San Francisco.

Please call a member of the Crosslin tax team at (615) 320-5500 if you have any questions. As always, we appreciate your business!

IMPACT OF SEQUESTRATION ON CORPORATE AMT CREDIT REFUNDS

On January 14, 2019, the IRS updated its announcement (the “IRS Announcement”), Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations to clarify that refundable alternative minimum tax (AMT) credits under Section 53(e) are not subject to sequestration for taxable years beginning after December 31, 2017.

AMT Credits and Bonus Depreciation
A taxpayer that paid AMT is eligible for an AMT credit under Section 53(b). The AMT credit is applied against regular tax liability in later years where the regular tax (subject to certain reductions) is higher than the tentative minimum tax.[1] This credit can be carried forward indefinitely, but may not be carried back or used to offset future AMT liability.

Section 168(k), as amended by the 2017 tax reform known as the Tax Cuts and Jobs Act (TCJA),[2] increased “bonus depreciation” from 50 percent to 100 percent expensing for both regular tax and AMT purposes. Full expensing is available for “qualified property” (generally, new property, or newly acquired used property, depreciated under MACRS with a recovery period of 20 years or less) acquired and placed into service after September 27, 2017, and before January 1, 2023. Starting in 2023, bonus depreciation phases down to 80 percent, then 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and 0 percent for property acquired and placed in service in 2027 and thereafter.

Under pre-TCJA Section 168(k)(4), for tax years beginning before January 1, 2018, corporations could elect to claim an increased AMT credit in lieu of bonus depreciation; the TCJA repealed this election.

Refundable AMT Credits
The TCJA repealed the AMT for corporations[3] and added a provision – Section 53(e) – that treats as refundable all corporate AMT credits not used to reduce regular tax liability in tax years that begin before 2022.

As a result, the TCJA allows taxpayers with significant corporate AMT carryovers to use such credits by reducing or eliminating tax liability in the subsequent year or to obtain a tax refund to the extent that the AMT credit exceeds taxable income for the subsequent year. For tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryovers exceed regular tax liability, 50 percent of such excess AMT credit carryovers will be refundable. Any remaining credits will be fully refundable in 2021.

Sequestration
The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, imposes limitations on certain budgetary outlays (referred to as “sequestration”), including certain refundable tax credits that are recorded as outlays in the federal government’s budget, rather than a return of taxes previously paid by taxpayers. These types of credits are reduced by a sequestration rate before being refunded to taxpayers.

The Office of Management Budget (OMB), in its report for fiscal year 2019,[4] determined a sequestration reduction rate of 6.2 percent. The IRS has confirmed that the 6.2 percent rate will apply to transactions processed on or after October 1, 2018, and on or before September 30, 2019.[5]

IRS Announcement
The IRS Announcement reversed earlier announcements by stating that “for tax years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits under Section 53(e) will not be subject to sequestration.”

This policy change applies only to Section 53(e) refundable AMT credits starting with the 2018 tax year, and does not change the IRS’s prior position for corporations making an election under Section 168(k)(4) and claiming a refund of prior year AMT credits for tax years beginning before January 1, 2018. Refunds/credits that result from corporations electing to claim an increased AMT credit in lieu of bonus depreciation under pre-TCJA Section 168(k)(4) are thus subject to sequestration.

The IRS Announcement further notes that corporations making the election under Section 168(k)(4) should use Form 8827, Credit for Prior Year Minimum Tax, to calculate the AMT credit incurred in prior tax years, the refundable AMT credit amount, and any minimum tax credit carryforward.

Impact
The recent IRS Announcement provides a favorable opportunity for corporations to receive the full amount of refundable prior-year AMT credits on their upcoming filings, without any sequestration reduction. For the 2018 tax year, AMT credits are first applied towards the regular tax liability (after nonrefundable credits are applied). Of the remaining AMT credit, 50 percent may then be claimed as a refundable credit, unrestricted by sequestration.

However, the IRS Announcement may require a re-evaluation of deferred tax assets (DTAs) recorded in a corporation’s financial statements for refundable AMT credits under Section 53(e). Based on earlier IRS announcements, companies might have concluded that the sequestration amount of DTAs relating to refundable AMT credits was not realizable, thus recording a partial allowance against AMT receivables in their financial statements for reporting periods ending prior to December 2018. 

Rather than reversing such an allowance, taxpayers may want to consult with their tax advisers to see whether a position could be taken that sufficient evidence to support a removal of the valuation allowance was not available until the IRS Announcement was issued on January 14, 2019, such that the valuation allowance is not removed from the taxpayer’s financial statements until the annual or interim period including January 14, 2019.

If you have any questions, call the Crosslin tax team at (615) 320-5500. As always, thank you for your business!

Eight Key Tax Planning Opportunities for 2019

More than a year after sweeping federal and state tax reform were enacted, businesses of all sizes are still wrapping their arms around the changes.  Additional guidance and regulations have been issued nearly every month—indeed, change is the new normal. Strategic tax planning now is key to lowering businesses’ total tax liability.  Read on for eight top planning opportunities and considerations businesses should review as part of their 2019 strategy.
 

  1. The GILTI, the FDII, and the BEAT – The 2017 tax reform package introduced several international tax packages that will either create tax liabilities or opportunities.  Very generally, the anti-deferral regime is expanded under GILTI, which taxes U.S. shareholders of CFCs on certain types of income earned by the CFCs, similar subpart F income.  The BEAT imposes an additional tax on certain corporations that erode the U.S. tax base through certain types of payments made to related foreign persons that meet certain thresholds.  And the FDII deduction provides a deduction for certain domestic corporations that service foreign customers or markets when the requirements are satisfied.  For 2019, estimating the impact of GILTI, FDII, and the BEAT on their tax liabilities and deductions is a key international tax planning consideration.
  2. Section 199A Deduction – The new Section 199A deduction may reduce a pass-through owner’s maximum individual effective tax rate from 37 percent to 29.6 percent.  Taxpayers should determine whether they qualify for the 199A deduction when estimating their future taxable income and while evaluating choice of entity considerations post-tax reform.  With proper tax planning under the recently-issued final regulations, a number of opportunities exist to possibly separate non-qualifying Specified Service Trade or Businesses (also known as “SSTBs”) from qualifying trades or businesses in order to take advantage of the reduced rate of tax on eligible activities that would otherwise have been recast as a SSTB given the relationship to the underlying activity.
  3. Interest Deduction Limitation – Taxpayers now face significant new limitations on their ability to deduct business interest paid or accrued on debt allocable to a trade or business pursuant to Section 163(j).  Section 163(j) may limit the deductibility of business interest expense to the sum of (1) business interest income; (2) 30 percent of the adjusted taxable income (ATI) of the taxpayer; and (3) the floor plan financing interest of the taxpayer for the taxable year (applicable to dealers of vehicles, boats, farm machinery or construction machinery).

    ATI is defined as the taxable income of the taxpayer computed without regard to items not attributable to a trade or business, business interest income or expense, net operating loss and capital loss carryovers and carrybacks, depreciation, amortization and depletion, certain gains from the sale of property and certain items from partnerships and S corporations. For taxable years beginning before 2022, deductions for depreciation, amortization and depletion for taxable will be taken into account in calculating adjusted taxable income. 

    Certain exceptions exist for small business taxpayers whose average annual gross receipts over the past three years do not exceed $25 million, certain electing real property trades or businesses, electing farming businesses, and certain utilities.
  4. Economic Nexus/Wayfair – The South Dakota vWayfair decision means that states are now free to subject companies to state taxes based on an “economic” presence within their state.  Taxpayers must now determine their nexus and filing obligations in states and localities, where compliance was not required before. This landmark decision presents an opportunity for taxpayers to enhance their technology solutions and update their reporting tools as they comply with state law changes.
  5. Bonus Depreciation – Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023, creating significant incentives for making new investments in depreciable tangible property and computer software.  Bonus depreciation allowances increased from 50 to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before 2023 (January 1, 2024, for longer production period property and certain aircraft). Plan purchases of eligible property to assure maximum use of this annual asset expense election and bonus depreciation, as the 100-percent bonus depreciation deduction ends after 2023. Since bonus depreciation is not allowed on certain long-term property of an electing real property trade or business for Section 163(j) purposes, an analysis should be performed to measure the cost of the forgone depreciation relative to the marginal benefit for the additional interest expense that would otherwise be allowed.
  6. Corporate Alternative Minimum Tax (AMT) Rescinded – This change presents a tax planning opportunity, as AMT credits can offset the regular tax liability for years after 2017. Going forward, any prior AMT liabilities may offset the regular tax liability for any taxable year after 2017. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50 percent (100 percent for taxable years beginning in 2021) of the excess credit for the taxable year subject to a 6.2 percent sequestration rate.

    A recent IRS announcement reversed the 6.2 percent holdback by stating that “for tax years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits under Section 53(e) will not be subject to sequestration.”
  7. Federal Research Credit – The credit is now even more valuable to businesses after tax reform due in part to the repeal of the corporate AMT and new rules related to net operating loss (NOL) limitations.  Now that AMT has been repealed, companies that paid AMT may now be paying regular income tax, which can be offset by the R&D credit, and income tax that can no longer be offset by NOLs, the R&D credit may help offset. Taxpayers seeking to maximize the benefit of immediately deducting R&E expenditures should consider the effective date of the required amortization rule and, if possible, accelerate their R&D activities prior to December 31, 2021.
  8. Opportunity Zones (O-Zones) – New O-Zone tax incentives allow investors to defer tax on capital gains by investing in Qualified Opportunity Funds.  Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund during the 180-day period beginning on the date of the sale or exchange giving rise to the capital gain. Once rolled over, the capital gain will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a zero-tax basis.  If the investment is held for five years, there is a 10-percent step-up in basis and a 15-percent step-up if held for seven years.  If the investment is held in the opportunity fund for at least 10 years, those capital gains in excess of the rollover amount (i.e., not the original gain but the post-acquisition appreciation) would be permanently exempt from taxes. To maximize the potential benefits, taxpayers must invest in a Qualified Opportunity Fund before December 31, 2019.

Rather than looking at each credit and new tax provision in a vacuum, Crosslin advises clients to look at all the changes holistically to assess their impact and develop their tax planning strategies. It’s important to determine your company’s total tax liability and structure your planning to address the full picture of your organization.

Please contact a member of the Crosslin tax team at (615) 320-5500 to talk about your tax planning strategies today. As always, we appreciate your business.

CRYPTOCURRENCY: THE TOP THINGS YOU NEED TO KNOW


Bitcoin and other cryptocurrencies are splashed across news headlines on a regular basis, charting a wild ride of extreme highs and lows. Once the sole domain of anti-establishment millennials burned by the 2008 recession, many institutional investors have shed their skepticism and are dipping their toes into the crypto market, adding exposure through crypto funds, futures, and other emerging investment options.

However, the world of crypto investing is still relatively uncharted territory. It is important to understand what cryptocurrencies are before investing or accounting for them. Organizations that take a step-by-step approach to due diligence and gain experience with small, low-risk projects involving cryptocurrencies may find they present exciting, new opportunities.

What is cryptocurrency?
Cryptocurrency is a type of digital asset that is an intangible, digital currency that uses a highly sophisticated type of encryption called cryptography to secure and verify transactions as well as to control the creation of new units of currency. It is designed to work as a decentralized medium of exchange, independent of a financial institution or any other central authority. While Bitcoin is the most well-known cryptocurrency, it is not the only one. Other major types of cryptocurrencies include Ethereum, Ripple, Bitcoin Cash and LiteCoin. There are also other digital assets (or “cryptoassets”).

These are commonly referred to as digital tokens. For example, a company can initiate a “token sale” or a “token launch” which is otherwise frequently referred to as an initial coin offering (ICO). In an ICO, a company is creating a new product and wants to build a user base who will benefit from purchasing the product early. The ICO also enables the company to raise proceeds to develop the product. It is attractive to companies because they can bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. While this FAQ does not further explore ICOs or tokens, entities are encouraged to consult with their legal, accounting and tax advisors given the complexities and significant debate by regulators around such digital assets.

What is Bitcoin?
While there have been several attempts to create cryptocurrencies since the 1990’s tech boom, Bitcoin is the first to gain widespread public notoriety. Leveraging opensource peer-to-peer technology, the transaction and issuance of Bitcoin is collectively managed by the network, effectively cutting out the middleman.

Introduced by an anonymous programmer or group of programmers under the alias “Satoshi Nakamoto,” Bitcoin has consistently dominated the crypto market since it became available to the public in 2009. It has remained relatively unchallenged until the introduction of the Ethereum platform in 2016. Cryptocurrencies, including Bitcoin and Ethereum, are more volatile than traditional fiat currencies. Fiat currencies are declared to be legal tender by a government and are not backed by physical commodities.

What is blockchain and how is it connected to cryptocurrency?
Blockchain technology is a type of distributed ledger technology (DLT) that facilitates peer-to-peer transactions in a secure and verifiable way without a centralized party. It is a single, incorruptible database that continuously records and timestamps transactions (or “blocks”) chronologically. Every transaction must be verified through a process known as “consensus,” requiring multiple-system participants to independently verify authenticity of the output of the algorithm creating the “block.” Once a new entry has been agreed to (verified) and made in the blockchain, it is “locked”, meaning it cannot be modified; it can only be updated by adding a new entry as an addendum.

The best-known use of blockchain to date is to support the transaction of cryptocurrencies such as Bitcoin and, while the two are often conjoined—and confused—Bitcoin is just one of many potential blockchain applications. Bitcoin is, in essence, a form of currency; blockchain is the database that enables its unique, secure transaction.

How are cryptocurrencies created?
The process of creating a new type of cryptocurrency coins requires either building a new blockchain or modifying an existing process to create a new variant, or “fork.” The majority of these so-called “altcoins” are forks of the Bitcoin protocol.

The only way more coins of an existing crypto coin can be created is through a process called “mining” in which the miner is awarded a transaction fee (a new coin) in exchange for contributing to the underlying blockchain algorithm by being the first to solve a cryptographic puzzle. Mining is extremely competitive and requires significant computing power.

Some cryptocurrencies, like Bitcoin, are finite in supply, meaning that there is a maximum number of coins that will ever be in circulation. Others do not have a maximum cap, but limit the number of new coins that can be generated each year.

Does U.S. GAAP address the accounting for cryptocurrencies?
Currently, U.S. GAAP does not specifically address the accounting for cryptocurrencies. However, given the increase in cryptocurrency transactions, questions are now being raised about how cryptocurrencies should be accounted for.

Can cryptocurrencies be used for purchasing and investing just like traditional physical money?
Cryptocurrencies can be used to pay for goods and services, as well as for investing in some areas around the world. In this respect, they are similar to physical currencies. However, unlike fiat money, cryptocurrencies have no physical form, they have not been declared to be legal tender in the United States, and the vast majority are not backed by a government or legal entity. In other words, the supply of a cryptocurrency is not determined by any central bank. Therefore, users participate in transactions directly without the involvement of any intermediary, which for fiat money, would typically be a bank. It should be noted that while cryptocurrencies may be used legally in many countries, there are others that hold transacting in cryptocurrencies to be restricted and still others to be illegal and may result in jail sentences for those doing so. These countries include (restricted): China, Saudi Arabia, Egypt, Zambia, and Mexico; (illegal): Bangladesh (jail), Vietnam, Morocco, Algeria, Bolivia (jail), Ecuador, and Nepal (jail).

Does cryptocurrency represent cash, a cash equivalent or a foreign currency?
Cryptocurrencies are not cash because they are not legal tender and are not backed by a government or other legal entity. For similar reasons, they are also not cash equivalents or foreign currencies under U.S. GAAP.

Does cryptocurrency represent inventory?
Entities use cryptocurrencies as a medium of exchange or for speculative purposes. In these instances, cryptocurrencies are clearly not inventory. In other situations, entities purchase or mine cryptocurrencies with the intent to sell them in the ordinary course of business and therefore, might be considered inventory. However, cryptocurrencies do not represent “tangible personal property” and therefore do not meet the definition of inventory under U.S. GAAP.

Is a cryptocurrency a financial instrument?
Cryptocurrencies are not financial instruments under U.S. GAAP because they do not represent cash or a contract establishing a right or obligation to deliver or receive cash or another financial instrument.

Is a cryptocurrency an intangible asset?
In our experience, cryptocurrencies are generally accounted for as indefinite-lived intangible assets, except in a few specific situations whereby they are held as an investment by investment companies – in which case fair value accounting is applied.

Intangible assets under U.S. GAAP are “assets (not including financial assets) that lack physical substance.” Further, financial assets are cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to receive cash or another financial instrument, or a right to exchange other financial instruments on potentially favorable terms.

Cryptocurrencies are not financial assets. They also lack physical substance. Therefore, they meet the definition of an intangible asset and would be recorded at acquisition cost (i.e. price paid or consideration given). Intangible assets are subject to an impairment test. Any recognized impairment losses cannot be subsequently reversed. Some believe the intangible model does not properly reflect the economics of cryptocurrencies because they can potentially be written down for impairment but never written up when they appreciate in value. This outcome could be less than helpful for financial statement users when significant volatility exists.

Unlike a direct purchase, additional complexity arises if cryptocurrencies are obtained through mining activities, as described above. In such instances, questions arise as to whether the transaction fees should be recognized as revenue or some other form of income. Additionally, miners incur costs for computer equipment, electricity and overhead. They must determine whether such costs can be capitalized based on existing U.S. GAAP, such as the guidance for internally developed intangible assets or other areas of U.S. GAAP.

How is cryptocurrency taxed?
The Internal Revenue Service has released very little guidance on the taxation of cryptocurrency. However, it did issue a 2014 notice in which they stated that cryptocurrency will be treated as property for federal income tax purposes. Depending on how the cryptocurrency is held, it could be classified as business property, investment property or personal property.

In addition to the character of the gain, it is critical that owners of cryptocurrency track their basis. Every time cryptocurrency is used for the exchange of goods or services, a taxable transaction occurs. For example, events that are considered taxable events include a coin to fiat sale, a coin to coin swap, purchases made by the cryptocurrency and the receipt of cryptocurrency for services. Other complexities around taxation of cryptocurrency exists and it is very important that individuals and businesses continue to monitor future guidance.

Insights

As cryptocurrencies continue to mature and evolve, unique regulatory, due diligence, tax and accounting challenges will continue to emerge. Without clear guidance from key regulators, industry innovation may get delayed. However, new financial products are already in the marketplace and mainstream industry acceptance continues to accelerate. While the cryptocurrency market continues to expand, service providers such as Crosslin are dedicated to staying on the cutting edge of regulatory pronouncements and rules governing the industry to serve our clients who are involved with this disruptive digital asset.

Please call the Crosslin team at 615-320-5500 with any questions. As always, we appreciate your business!