March 22, 2023
NFTs as collectibles: IRS issues guidance and seeks comments - Martha Waggoner, The Tax Adviser:
The IRS in Notice 2023-27 announced it intends to issue guidance on the treatment of nonfungible tokens (NFTs) as collectibles. The Service also described how, until that guidance is issued, it will determine whether an NFT is a collectible and asked for comments generally on the treatment of NFTs as collectibles under Sec. 408(m) and to specific questions listed in the notice
In the notice, the IRS said that, pending the issuance of the intended guidance, it will use a lookthrough analysis when determining if an NFT should be treated as a collectible; i.e., it will analyze whether an NFT's associated right or asset falls under the definition of a collectible in the Code to make the determination. For example, if a gem is a collectible under Sec. 408(m), then an NFT certifying ownership of a gem also is a collectible.
From the Notice:
An NFT is a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset. Ownership of an NFT may provide the holder a right with respect to a digital file (such as a digital image, digital music, a digital trading card, or a digital sports moment)1 that typically is separate from the NFT. Alternatively, NFT ownership may provide the holder a right with respect to an asset that is not a digital file, such as a right to attend a ticketed event, or certify ownership of a physical item.
Some NFTs to Be Considered Collectibles Under IRS Guidance - Mary Katherine Browne, Tax Notes ($):
Under the planned guidance, the government will use a look-through analysis to determine whether an NFT’s underlying asset can be classified as any of the collectibles identified in section 408(m)(2). Any NFT that provide a right to use or develop a plot of land don’t constitute a collectible under the statute.
The guidance also specifies that NFTs fall under the sale or exchange of collectibles for the purposes of section 1(h). Therefore, a taxpayer who holds an NFT determined to be a collectible for longer than a year and then sells or exchanges it is subject to a maximum 28 percent tax. If an NFT’s asset is determined not to be a collectible, proceeds from the sale of it will be subject to a maximum 20 percent long-term capital gains tax rate.
For Influencers, Tax Season Is the Wild West - Ashley Wong, Wall Street Journal. "One perk of being an influencer is the free stuff. A possible downside? Figuring out whether all the makeup, handbags, clothes, perfume, spa treatments, flight tickets and other freebies could be considered taxable income."
Dirty Dozen: Watch out for scammers using email and text messages to try tricking people during tax season - IRS:
Taxpayers and tax professionals should be alert to fake communications posing as legitimate organizations in the tax and financial community, including the IRS and states. These messages arrive in the form of an unsolicited text or email to lure unsuspecting victims to provide valuable personal and financial information that can lead to identity theft. There are two main types:
- Phishing is an email sent by fraudsters claiming to come from the IRS or another legitimate organization, including state tax organizations or a financial firm. The email lures the victims into the scam by a variety of ruses such as enticing victims with a phony tax refund or frightening them with false legal/criminal charges for tax fraud.
- Smishing is a text or smartphone SMS message that uses the same technique as phishing. Scammers often use alarming language like, "Your account has now been put on hold," or "Unusual Activity Report" with a bogus "Solutions" link to restore the recipient's account. Unexpected tax refunds are another potential target for scam artists.
The IRS initiates most contacts through regular mail and will never initiate contact with taxpayers by email, text or social media regarding a bill or tax refund.
Never click on any unsolicited communication claiming to be the IRS as it may surreptitiously load malware. It may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files.
Official Suggests Different Path for Using IRA Funding at IRS - Lauren Loricchio, Tax Notes ($):
Speaking March 21 during a Tax Executives Institute conference, Douglas O’Donnell, IRS deputy commissioner of services and enforcement, told tax professionals that “as you think about where the IRS would really like to invest, it would be in systems and in improving service.”
“We can get to the enforcement at some point — we need to do it,” said O’Donnell, who recently served as acting IRS commissioner. “To the extent that people can comply, they’re able to comply. . . . That is a better investment; it makes it easier.”
If compliance is easier, you don't need as much enforcement.
Treasury Clarifies Eligibility For Chips Tax Credit - Kat Lucero, Law360 Tax Authority ($):
Good luck running things without sales.
A new chip factory's human resources, legal, accounting, sales, distribution and noncybersecurity operations will not qualify for the investment tax credit meant to encourage the production of advanced semiconductor technology, the U.S. Department of the Treasury announced Tuesday.
These functions are not integral to the production of semiconductors or semiconductor manufacturing equipment because they are not directly used in the production process, Treasury said in a notice that begins the proposed rulemaking process for the 25% advanced manufacturing investment credit enacted in August.
Kansas Bill Would Amend SALT Cap Workaround Law - Emily Hollingsworth, Tax Notes ($):
A proposed Kansas bill would clarify what constitutes taxable income for purposes of the passthrough entity tax election and would allow entity owners to claim an offsetting individual income tax credit.
In guidance issued March 14 for passthrough entities with both Kansas and non-Kansas income and resident owners, the Department of Revenue said section 79-32,287(a)’s description of income attributable to the state is “unclear and can be interpreted in more than one way," and noted that a legislative correction would be required to "address this discrepancy and permit proper administration." The department recommended that filers delay filing Forms K-120S, which are due April 18, until a worksheet is provided to explain the calculation.
Don't miss these 10 often overlooked tax breaks - Kay Bell, Don't Mess With Taxes. "4. Deductible IRA contributions: Traditional IRAs are still popular for many people for a variety of reasons. One them is that contributions, in full or part, to these retirement vehicles might be deductible. This twofer — getting an immediate tax break while saving for your post-work years — also is a tax break that still available for the prior tax year. You have until Tax Day, again April 18, to establish and put money into a traditional IRA for the 2022 tax year. That's a maximum $6,000 if you're younger than 50, or $7,000 if you're age 50 or older."
IRS Warns On ERC Scams As It Announces Annual Dirty Dozen - Kelly Phillips Erb, Forbes. "The IRS specifically called out schemes from promoters who have been blasting radio and internet ads touting ERC refunds."
You’re Facing a Big Tax Bill If You Hold These Mutual Funds - Claire Ballentine, Bloomberg ($). "After a years-long bull market, many stocks in mutual funds had increased in value since they were purchased, despite the S&P 500’s 19% drop last year. That means they were subject to capital gains taxes when they’re sold. Those taxes are passed onto the fund’s holders, who have to pay even if they only bought into the fund recently."
Tax and higher education: a breakdown - National Association of Tax Professionals. "With the rising cost of college and higher education, it’s important to know all the higher education tax benefits available."
Joint Committee Review of Refund Cases - Keith Fogg, Procedurally Taxing ($). "Unlike most refund claims which are reviewed by the IRS, or maybe not reviewed, before a check is sent, if the taxpayer claims a refund of more than $2,000,000, IRC 6405(a) provides that the refund cannot be paid until 30 days after it submits a report to the JCT for review."
Fire Victims Wait Years For PG&E & Edison To Settle Then Face IRS Taxes - Robert Wood, Forbes. "Most legal settlements are taxable, even for a devastating fire loss."
More of the Same: Breaking Down Biden’s Budget - David Stewart, Alexander Rifaat, and Kyle Pomerleau, Tax Notes Opinions. "If these proposals are good policy — well, some of them are reasonable policy, some I think might be less reasonable policy — it stands that then these proposals are worth doing across the board. I don't think it's necessary to add this additional tier of complexity to the tax code on top. It's on top of a tax code that's already too complex. Tax reformers want to simplify the tax code; this is moving in the opposite direction."
More Countries Are Fighting Tax ‘Treaty Shopping,’ OECD Says - Michael Rapoport, Bloomberg ($). "Treaty shopping consists of attempts to access the benefits of a tax treaty between two countries without being a resident of either."
Bad news for this place:
The Supreme Court Deals IRS a Losing Hand in FBAR Non-Willful Penalty Case - Tax Litigator.com. "The Supreme Court split 5-4, with Justice Gorsuch penning the majority opinion and Justice Barrett penning the dissent, in which she was joined by Justices Thomas, Kagan and Sotomayor."
No Whistleblower Award for Information Leading to the Creation of OVDI Program - Parker Tax Pro Library. " The court found that by creating OVDI, the IRS did not undertake a 'civil or criminal proceeding against any person' along the lines of the examples provided in the regulation, let alone a court proceeding."
GILTI Tax for US Expats - What You Need To Know - 1040 Abroad. "GILTI tax is a provision of the U.S. tax code that applies to U.S. taxpayers who own at least 10% of the shares of a controlled foreign corporation (CFC). The purpose of GILTI tax is to discourage profit shifting to low-tax countries by taxing the U.S. shareholder’s share of the CFC’s global intangible low-taxed income (GILTI)."
Related: GILTI Tax Impact on U.S. Individuals.
El Dorado County couple found guilty of tax fraud - IRS (Defendant names removed):
According to court documents and evidence presented at trial, Defendant Husband was a mortgage broker for Wells Fargo and then Bank of America from 2011 through 2013. He claimed business expenses in excess of $800,000 for all three years, effectively paying only a 2% tax on the more than $1.1 million he earned. Defendant Wife is an attorney licensed by the California State Bar. When the IRS began a civil audit of their taxes, Defendants tried to hide their crimes by falsely claiming that personal expenses were business expenses, telling falsehoods to the civil examiner, and obstructing the IRS audit by not providing requested documents.
For the IRS audit, the Defendants, claiming their business records had been shredded or lost, recreated spreadsheets of their business expenses that listed various items as business expenses that were actually personal expenses, including travel to Europe, the Eiffel Tower, Hawaii and Cancun; wine racks and a personalized wine bottle in their wine cellar; a California king bed; patio furniture; automated tiki torches; birthday party and baby shower expenses; home gym exercise flooring; and other items. In June 2016, the IRS executed a search warrant at their house in El Dorado Hills. In addition to finding many pieces of furniture and household goods that had been claimed as business expenses, agents also found tax records and receipts, despite the Defendants' claims that all records and receipts had been destroyed.
Reading between the lines here, you can see a terrible mistake, besides (allegedly) deducting personal expenses. It started as a civil audit, where the stakes were only taxes, interest, and monetary penalties. It apparently became a criminal matter when the IRS decided the couple was not playing straight with the examiners. Things went downhill from there. Rather than just owing money, the defendants now may face prison time.
Related: Eide Bailly IRS Exam Assistance.
My New Boyfriend Offered to Pay Off My Credit Card Debt. Help! - Philip Galanes, New York Times. "The practicalities are easily handled: Create a simple written agreement with clear payment terms to govern the loan in case your fledgling romance sours. The repayment must be independent of your relationship. Also, confirm with an accountant that the dollar amount here is too small to trigger any gift tax, or to count as reportable income."
Spring fever. It's Daffodil Day. If that's too much work, it's also International Good-Off Day!
This is a roundup of tax news and opinion. Any opinions expressed or implied are those of the author and not necessarily those of Eide Bailly. Opinions found in linked items are those of the authors of the linked item, not of your bloggers or of Eide Bailly. “$” means link may be behind a paywall. Items here do not constitute tax advice.