Crypto Investors: Loss Deductions, Regulation and Oversight
There have been three recent developments in the cryptocurrency arena:
1. Loss tax deductions for FTX investors. Investors with inaccessible assets tied up in cryptocurrency exchange FTX Trading Ltd. will need to wait until court proceedings conclude before learning if loss tax deductions will be available. FTX filed for bankruptcy in early November.
Legible, a cryptocurrency tax and accounting platform, has stated that consumers are likely to incur deductible losses but not soon. Instead, because FTX filed Chapter 11 bankruptcy, Legible explained these losses will likely not be recognizable on tax returns until (at least) 2023 once fully ruled on in court. U.S. Treasury Secretary Janet Yellen said that FTX's downfall "demonstrates the need for more effective oversight of cryptocurrency markets."
2. The federal government will soon be increasing its regulation of cryptocurrency. Starting in January 2023, crypto brokers must observe new tax reporting requirements. These include providing investors with IRS Form 1099-B, which documents crypto profits and losses. Buying crypto generally isn't taxable. However, trading it, converting it to cash and using it for purchases, may be. Regardless of the specific activity, investors must disclose any crypto ownership by checking a box on their tax returns. The new regulations are expected to yield $28 billion in new taxes over a decade and close several loopholes. More regulations from the IRS and SEC may be forthcoming.
3. Meanwhile, Congress is seeking answers. In the wake of cryptocurrency exchange FTX's bankruptcy filing, Senate Finance Committee Chair Ron Wyden (D-OR) is seeking answers on what safeguards are in place to protect retail investors in the event of bankruptcy or theft.
Wyden recently sent letters to crypto trading platforms Binance, Bitfinex, Coinbase, Gemini, Kraken and KuCoin. He asked the exchanges to provide information regarding internal security controls, balance sheet health and suspicious activity monitoring. Wyden also sought clarity on how the companies "address any potential financial irregularities, tax compliance issues, or money laundering concerns identified by internal or external auditors."
Contribute More to Your FSA in 2023
Taxpayers that participate in employer-sponsored health Flexible Spending Accounts (FSAs) can contribute more in 2023. The annual contribution amount will rise to $3,050 (up from $2,850 in 2022).
FSAs allow owners to pay for qualified medical costs with pre-tax dollars. That's good news if you're scrambling to keep up with rising costs. FSA owners use a debit card or pay out of pocket for expenses and then seek reimbursement. FSA funds must be used by year end unless an employer elects to allow a two-and-a-half-month carryover (or grace period). For 2023, the amount that can be carried over to the following year will rise to $610 (up from $570 for 2022). Contact your tax advisor with questions.
Do You Know What Your Filing Status Is?
Before you know it, tax filing season will be here. One of the basic things to know is your correct filing status. Most of the five statuses are easy to determine. They are:
- Married filing jointly,
- Married filing separately,
- Head of household, and
- Qualifying widow(er).
The head of household status is often misunderstood. It can lead to owing less tax than single status. But to qualify, you must maintain a household for more than half the year as the principal home for a qualifying child or other relative that you can claim as a dependent. Under a special rule, this may include a parent that doesn't live with you.
Click here for more information from the IRS or contact your tax advisor with questions.
Required Minimum Distributions: Important Considerations for Certain Taxpayers
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 72 (70½ if you reached 70½ before January 1, 2020). There are two considerations for people who are interested in giving their distributions to charity and those who inherited retirement plans in 2021 or 2022.
1. Seniors who are charitably inclined. Distributions from a traditional Individual Retirement Account (IRA) are generally taxable when received, though exceptions exist. For charitably inclined taxpayers who are at least 70½ years old, one tax-favored exception is the qualified charitable distribution (QCD). A QCD is a nontaxable distribution made directly by an IRA's trustee to organizations that are qualified to receive tax-deductible contributions.
A QCD can benefit taxpayers by letting them support the qualified charity of their choice, while reducing their taxable income. With a QCD, there's no need to itemize deductions. The maximum annual QCD exclusion is $100,000. Note that if you wish to make a QCD for 2022, you should contact your IRA trustee soon so there's time to complete the transaction before year end. Click here for more information.
2. Taxpayers who inherited IRAs and other plans. The IRS is providing relief for taxpayers who didn't take certain RMDs from inherited IRAs and other plans. The relief under Notice 2022-53 is for taxpayers subject to the "10-year rule" who inherited retirement plans but didn't take RMDs in 2021 or 2022 but were required to do so.
The SECURE Act requires that inherited plans must generally be paid out on or before December 31 of the 10th calendar year following the original holder's death. But under proposed regulationss issued in early 2022, distributions must begin in the 1st calendar year following the year of the original holder's death. The IRS will issue final regs but stated that penalties won't apply for failure to take RMDs in these cases. Contact your tax advisor with questions about your situation.
Court: Charitable Donations Must Be Properly Substantiated
To receive a charitable tax deduction for the donation of art, a donor must properly substantiate the deduction. This is done with either a qualified appraisal or completion of Form 8283, "Noncash Charitable Contributions."
In one recent case, an art dealer and collector donated a sculpture for which he claimed a $600,000 charitable tax deduction. The IRS disallowed the deduction because the donor failed to properly substantiate it. He didn't attach to his return either a fully completed Form 8283 or an appraisal.
The U.S. Tax Court also disallowed the deduction. The taxpayer sought to avoid having his deduction disallowed under a section of the tax code that provides a deduction to be allowed despite failing to substantiate it "if it is shown that the failure . . . is due to reasonable cause and not to willful neglect." However, the court determined the taxpayer didn't show that the failure was due to reasonable cause. (TC Memo 2022-102)