The IRS’s Treatment of Bitcoin Payments
If you’ve paid attention to the news the last few years, then you have probably heard of Bitcoins. In fact, you may even have considered accepting them as payment for services or product sales. Before you do, you’ll want to make sure you have an understanding of how the IRS treats Bitcoin payments.
First, it’s important to be aware of the fact that the IRS does not consider Bitcoins, which are virtual currency, as a legitimate state-backed currency. Instead, they see Bitcoins as property.
How does this affect you as a taxpayer? This means that the tax rules that apply to property transactions will also apply to payments received in Bitcoins. When a person or business acquires property, they are required to record the fair market value of the property. This will become the owner’s basis for the property.
Once the property is sold or exchanged, if the fair market value of the property has increased, then the owner will have a taxable gain. On the other hand, if it has decreased in value, the owner will have a loss.
This means that if a business owner sells a product today and receives Bitcoins worth $100, but then converts them to dollars next week and the value has increased to $120, they will have a gain of $20 that will be taxed as capital gains.
This becomes even more complicated when multiple Bitcoin transactions take place. Each transaction needs to be tracked separately, and each will have its own gain or loss depending on the current valuation of Bitcoins when they are converted to dollars. The amount of paperwork and record-keeping becomes significant.
There are a couple of workarounds for this. First, each transaction can be converted to dollars immediately. Secondly, there are now Bitcoin merchant service providers that will deal with all of the back-end record-keeping that is necessary. This allows businesses to accept Bitcoins without ever actually dealing with them.
The IRS ruling to treat Bitcoins as property turned the Bitcoin world and those who want to accept them on their heads, but technology and even the IRS will eventually catch up to the new reality of virtual currencies. It just may take awhile.
For more information on tax implications associated with Bitcoins, please contact us today!
Section 179 – Why it Still Matters
Section 179 allows a business to deduct the total cost for qualified leased, financed or purchased equipment in the year it was purchased instead of depreciating the cost over the life of the equipment. Typically, however, Congress waits until after the first of the year to renew this section, which can hurt small business owners and manufacturers as well as farmers, dentists and medical providers.
Very often, Congress doesn’t get around to renewing tax breaks, such as Section 179, until well after the end of the year. Then they make it retroactive. This creates a variety of issues for businesses who attempt to plan purchases with tax breaks in mind. Often, small businesses will miss out on the tax altogether.
While tax breaks such as Section 179 are typically renewed each year, it isn’t a given. That means businesses as well as farmers and even those in the medical profession won’t know if they are allowed to deduct $25,000 or $500,000. The final approved amount depends on whether or not the larger deductions are renewed. If not, the limit reverts to the original $25,000.
This can make a buying decisions difficult. For example if a farmer needs to buy a new combine, the farmer is looking at an investment of up to half a million dollars. If Section 179 isn’t renewed at the higher levels, this investment may need to be reconsidered. The same goes for medical or manufacturing equipment.
Still, for a small business, even the limit of $25,000 can make a tremendous difference. Being that off-the-shelf software also qualifies for this deduction, a small business could update its software to enhance efficiency, therefore increasing its bottom line.
Tax planning is a critical component of running a successful company. In order for small businesses to plan for the next year while they still have the time to implement smart decisions, it’s imperative that Congress acts in an efficient and timely manner. Small businesses are the backbone of this county and do drive the economy, and Congress shouldn’t forget that.
For more information, please don’t hesitate to contact the office today!
How to File an Appeal with the IRS
The thought of having to communicate with the Internal Revenue Service about something you believe is an agency error is intimidating to most people. However, you are allowed to start a dialogue with the IRS if you feel that its findings are incorrect. The tax code is massive and often difficult to decipher, and everyone gets at least a little nervous when they consider engaging the governing agency.
Yet, there are numerous reasons why you might dispute something that the IRS has communicated to you. You might think, for example, that the law was not interpreted correctly, so a decision may not have been the right one. Or you don’t believe that a collections effort should have been initiated against you, or you feel that your offer in compromise should have been accepted.
There are three things you need to do first:
- Double-and triple-check any IRS publications that you consulted to make sure you read them correctly, as well as to be sure that you’re very clear on what your position is and why.
- Decide whether you are going to go it alone or whether you would like a CPA or attorney to represent you.
- Prepare to file a written protest to request an Appeals conference.
Note: You may be able to bypass this formal document if you qualify for something like the Small Case Request. Check with us to see which procedure will be appropriate in your case.
Even if you choose to let us guide you through this complex process, you can start gathering information for the written protest. The IRS expects it to contain a great deal of detail, including:
- Your contact information,
- A clear statement indicating that you intend to appeal to the Office of Appeals because of changes that the agency suggested,
- The letter that the IRS sent you that outlined the changes it believed needed to be made,
- The pertinent tax period(s) or year(s),
- A list of the items with which you take exception,
- Your rationale for disagreeing, including supporting facts,
- Your signature, of course, and
- A statement and signature from any professional who helped you prepare the protest document.
Talk to us if you’re protesting a lien, levy, seizure, denial or termination of an installment agreement. These disagreements require a different procedure.
Be Proactive
You may assume that the IRS is always right and therefore may be uncomfortable second-guessing the changes the agency made to your tax return. However, you have a perfect right to protest – as long as you’re certain of the rationale for your dispute. The best way to avoid having to go through this process, of course, is to be exceptionally careful about your tax return in the first place. This requires planning throughout the year and a thorough understanding of all of the information you supply to the IRS.
If your return contains more than some simple income and deductions, we’d be happy to work with you from start to finish. Call us today to get started!
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