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1. What are the changes to the Tax Code?

2. What do the Like-kind exchanges stand for?

3. What is the difference between the old tax law and the new one concerning the loss carrybacks?

4. How are short-term and long-term capital gains taxed according to the new Tax Code?

5. What does the new Tax Code allow business to do with the pass-through deduction?

 

How the New Tax Law Impacts Cryptocurrencies

    The tax bill that Donald Trump signed into law in late December represents the most substantive changes to the federal tax code in 30 years, but Congress passed up its chance to clarify matters for cryptocurrency investors, traders, issuers and miners. The community is left with a host of questions and ambiguities; but while the tax bill does not directly address cryptocurrencies such as bitcoin, ether and the tokens issued through ICOs, it does impact them indirectly.

Especially important are changes to five provisions in the tax code: like-kind exchanges, loss carrybacks, the corporate tax rate, the business interest deduction and the treatment of pass-through businesses. 

Like-Kind Exchanges

Google "bitcoin tax bill" or some variation, and most of the results will focus on section 1031 of the tax code, which allows capital gains taxes to be deferred for certain "like-kind" exchanges of property for other, similar property. The provision was originally envisioned as a break for farmers swapping livestock, but came to be used for trades in commercial real estate, art and airplanes – and cryptocurrencies.

 Loss Carrybacks

A second change to the tax code affects businesses in the cryptocurrency space, such as those raising money by issuing tokens through initial coin offerings (ICOs) or a similar fundraising method known as a SAFT. Under the old tax law, business losses could be carried back two years, a boon to companies that raise money in a token sale one year, then experience operating losses in subsequent years. The new law eliminates loss carrybacks.

    Corporate Tax Rates

The central provision of the new tax law is a steep cut in the top corporate tax rate from 35% to 21%. Short-term capital gains are taxed as ordinary income, at marginal rates ranging from 10% to 37% under the new law in 2018. Long-term capital gains – profits from selling assets held for at least a year – are taxed at a top rate of 20%. For traders who hold cryptocurrencies for shorter durations, therefore, the new corporate rate could represent an opportunity.

    Pass-through Deduction

The introduction of a new deduction for pass-through entities, which allow business income to be paid through personal tax returns, could also represent an opportunity. The new law allows a deduction of up to 20% of pass-through income, limited to 50% of wages paid by the entity or 25% of wages plus 2.5% of the unadjusted basis of the entity's property. 

 Business Interest Deduction

The new law doesn't just give, however, it taketh away. Business interest deductibility – previously unlimited – will be capped at 30% of adjusted earnings. Miners in particular appear to be taking on the kind of leverage that runs into the limit. The new cap does not apply to personal interest, so it won't apply to people out there mortgaging their houses to buy bitcoin.

 

By David Floyd | January 8, 2018

INVESTOPEDIA

https://www.investopedia.com/news/how-new-tax-law-impacts-cryptocurrencies-trump/?utm_source=personalized&utm_campaign=www.investopedia.com&utm_term=12147163&utm_medium=email

 

CASE STUDY

One of the Three Certain Things in Life: Taxes, Taxes, and More Taxes

Scenario 3

Bill Gold has a successful lawn-care business and a 20-hour-a-week job at a garden shop. Bill believes that the social security system will not exist by the time he is ready to retire. He feels that citizens should be allowed to save their own money for retirement instead of being required to pay social security tax from their income. He grudgingly accepts that social security taxes must be deducted from his paycheck from the garden shop. However, he does not pay social security on the income he makes from his lawn care service.

    Bill’s wife, Shirley, is a hair stylist. She does not report all her tips to the IRS. Shirley is concerned that the IRS will discover that she and Bill are not reporting all their income and that the government will expect Bill to pay social security tax on his lawn care income. She raises this concern with Bill saying, ‘I worry that the IRS will audit our income tax returns. Your business has grown rapidly, and they might decide to trace all our earnings.’

    Bill reassures Shirley, saying, ‘How can the government keep accurate records on millions of people?’ he goes on to say that records of cash payments cannot be traced and that even if the IRS catches on to him, he will be able to produce records of enough business expenses to offset any income received. Shirley accepts Bill’s explanation but still worries that what they are doing is unethical and that an audit would result in hefty fines and a requirement to pay back taxes.

 

Items for Consideration

1. What is the rationalization in this case?

2. Instead of hoping that the government does not find out about Bill’s lawn-care earnings, what should Bill and Shirley do? (Remember, Bill feels he can show enough expenses to offset income.)

3. Are Bill and Shirley’s actions ethical? Are they legal? Why or why not?

4. Will Shirley also be in trouble if Bill’s income tax return is audited, even though it involves his lawn-care business?

5. Do you believe that today’s workers should be required to pay social security taxes even though this fund may run out by the time they retire?

6. What alternatives to social security might be possible?

7. Can individuals like Bill take it upon themselves to choose an alternative way to save for retirement instead of social security? Why or why not?



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