A Bitcoin Mystery For the uninitiated, bitcoin is the most prominent of several “virtual currencies”, money that exists only online and is not backed by any government. Released in 2009 by an unknown person or group going by the name Satoshi Nakamoto, bitcoin is maintained by a decentralized network of computers, called “miners,” that process and verify transactions. Recently, the value of all bitcoins in circulation was nearly $8 billion according to CoinDesk. This year, the price of a bitcoin has risen from approximately $13.50 to $1,200 and then down to approximately $650. Experts say, however, that there is no agreement on a host of fundamental questions for U.S. taxpayer holding or using virtual currencies. Among the pressing issues: When should bitcoin be considered a commodity, a currency, or a capital asset for tax purposes? Are bitcoin transactions similar to barter? Is bitcoin subject to the same stringent tax rules as secret offshore accounts? And how will U.S. officials keep bitcoin, which is even more anonymous than cash, from being used to promote tax evasion or money laundering? So far, the Internal Revenue Service has not ruled on or addressed such issues directly. Meanwhile, bitcoin investors and users should be aware of some thorny basic issues: 1) If bitcoin is a capital asset then those long-term capital gains would qualify for a top federal tax rate of about 24%. But losses above $3,000 would only be deducted against other capital gains. 2) If bitcoin counts as a currency (like euros) then gains will be taxed at federal rates on ordinary income up to 43.4% and losses will be fully deductible against ordinary income. In the preliminary filing, the Winklevoss Bitcoin Trust – a public fund registered by brothers Cameron and Tyler Winklevoss, of Facebook fame, said it intends to treat bitcoin as a capital asset instead of a currency, unless the IRS rules otherwise. 3) Taxpayers may also have difficulty tracking a bitcoin’s cost basis, which is the price, used as the starting point for measuring taxable gain or loss. 4) Whether offshore accounting rules apply to bitcoin. Taxpayers with $10,000 or more in non-US based financial accounts have to report the accounts to the U.S. A spokesperson for FinCen, the US Treasury Department charged with preventing financial crimes, says this question is under consideration and will be made in consultation with the IRS, but it is unclear when. 5) The IRS could face a bigger headache if bitcoin replace tax havens as the venue of choice for tax evaders. Virtual currencies possess the traditional benefits of tax havens; anonymity and no tax. Many specialists are “stumped” as to how the IRS will rule on bitcoins if you take a reasonable position, they probably will accept it. Taxpayers who have bitcoin and flout the rules may be opening themselves to penalties, interest, and possible fraud prosecutions. Wall Street Journal 12/21/13 p. B7. Commercial Envy Each year I watch the Super Bowl for the commercials and generally am very disappointed at the quality. Compare them to the superb commercials for the Olympics led by P&G Thank You Mom commercials. Not Just Taxes! A client recently sent us this note…. Thank you so very much for your help, Howard. You have been a kind and trusted advisor for my family for over 30 years. This is what we are, trusted family advisors who also prepare tax returns, invest and create and protect wealth, perform multi-generational planning, deal with college funding issues, and business and legal matters. Who’s Next? Vallejo , Stockton, Greece, Illinois, Detroit, Puerto Rico…… New York Wants You! Update In our March 2011 newsletter, we described cases where out of New York State residents who had a piece of residential real estate in New York were taxed by New York State as residents (see the newsletter for details). A new decision from New York’s highest court makes it less likely that out of state residents who own houses or apartments in New York will be forced to pay city and state taxes. The Court of Appeals ruled that auditors would now have to show that out-of-state residents actually used their New York property as their own houses in the course of the year. The appellate decision stemmed from a case involving the owner of an auto repair and service station on Staten Island who lived in New Jersey and bought a small apartment building near his shop both as an investment and as a home for his elderly parents. The owner said he never lived there but stayed overnight occasionally to care for his parents and he paid the bills. Wall Street Journal 2/21/14 p. A17. Summer Reading Having just finished reading The Brothers, John Foster Dulles, Allen Dulles, and Their Secret World War by Stephen Kenzer, I now have a much better knowledge of the foreign adventures that the U.S. embarked upon whose effects are still shaking the world. These adventures helped pushed countries from Guatemala to the Congo into long spirals of violence, led the U.S. into the Vietnam War, and laid the foundation for decades of hostility between the U.S. and countries from Cuba to Iran. It is a disturbing and provocative book that opened my eyes wider to events, which have been whitewashed from history. It is a fascinating and an easy read. As always, if you have any questions about these or any other matters, do not hesitate to call us. Remember, We’re Here For You!