Matt Metras, EA, Author at Think Outside the Tax Box

AUTHOR SPOTLIGHT

Matt Metras, EA

Matt Metras, EA is the owner of MDM Financial Services in Irondequoit, NY. He has been practicing since 2003 and specializes in bookkeeping and taxation for cryptocurrency clients. He has instructed on Cryptocurrency Taxation for the National Association of Enrolled Agents and NY Society of Enrolled Agents. Additionally, he is an administrator of the “Bitcoin & Cryptocurrency Tax Info” Facebook group and a moderator of the r/cryptotaxation subreddit. Matt is also a passionate community advocate and serves on his local Board of Education.

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Year-End Tax Strategies for the Investor

The end of the year is a time for holidays, family, and maybe overindulging at the dinner table. It can also be a time for substantial tax savings. There are many techniques a taxpayer can use to minimize their tax burden for the year. The key to many of them is acting before the calendar year comes to a close.

Specifically, let’s examine tax strategies for the taxpayer with investments, such as stocks, bonds, and mutual funds. These strategies can help taxpayers lower taxes, keep more money in their pockets, and donate to their favorite charities.

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Crypto and the Wash Loss Rule

Wash Up for Tax Savings – Cryptocurrency and the Wash Loss Rule

When recognizing capital gains during a tax year, it can often make financial sense to sell assets that have lost value to offset profits in other investments or regular income. In this situation, you swap stocks, bonds, or mutual funds by buying a similar asset, selling the old asset and taking a loss.

This strategy is called tax-loss harvesting, and it can be applied under certain circumstances which will lower your taxes. Yet while the tax deduction might seem appealing, you might have a hard time locking in that loss forever, and you may be inclined to repurchase the same investment in case the value rebounds.

This strategy may appear brilliant on paper; however, the IRS doesn’t allow such manipulation just to reduce taxes.

The Wash Loss Rule prevents traders from realizing a tax loss on a position that the taxpayer reacquires within 30 days after (or before) selling a security.

But a little known loophole may allow you to complete a wash sale and claim your deduction without recognizing the loss forever as long as it is crypto.

Cryptocurrency continues to be an area where the rules don’t always seem to make sense. Most experienced investors are already familiar with the “Wash Loss Rule,” while many newer investors have recently learned about it the hard way.

To learn this valuable strategy for offsetting your capital gains while remaining in the investment gain for expected future growth, continue reading to learn more.

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To the Moon: Tax Saving Strategies for Meme Stocks

To the Moon: Tax Saving Strategies for Meme Stocks

Think back to January 2021. A new President was sworn in; Twitter was obsessed with “Bean Dad,” and the term “Meme Stock” entered popular culture. A previously obscure subreddit called “Wall Street Bets” began making front page headlines. Average Americans took their “Stimmies” and invested them into unpopular companies, some on the verge of failure, and started making double digit percentage gains per day by pitting their collective holdings to short squeeze institutional investors.

Companies that no analyst listed as a good buy, such as a retail video game store (retail is still a thing?), a movie theater chain (in the middle of a pandemic) and multiple cell phone companies (that don’t produce Apple or Android phones) all began to skyrocket overnight. As of this writing, GameStop Corp. ($GME) was up nearly 2000 percent in the last year. It’s likely while riding the adrenaline rollercoaster, most investors were not thinking about taxes. There are no taxes on the moon, but it’s not too late to plan for tax consequences here on Earth.

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Tax Strategies for the Worthless NFT

So, you bought an NFT of a unicorn riding a unicycle. That sounds nifty. Turns out, though, even though you paid $500 for it with the expectation of a tidy profit, no one actually wants to buy it from you. It’s now so worthless you can’t even give it away. Is there a way to at least deduct the loss and save a bit in tax?

Let’s find out.

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Should You Move to Puerto Rico for Crypto Tax Savings

Should You Move to Puerto Rico for Crypto Tax Savings?

At least once a week in the cryptocurrency community, there is a new post or article encouraging crypto investors to relocate to Puerto Rico to avoid tax. Relocating to the Caribbean is certainly an attractive proposition, but is it too good to be true? In the words of every good tax professional everywhere, “It depends.” Becoming a resident of Puerto Rico does have some potential tax benefits that come with it, but it is no slam dunk decision. Let’s take a trip together to the Island of Enchantment, grab a cocktail on the beach, and lower our tax bill!

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Pros and Cons of Cryptocurrency Mining as a Trade or Business

As cryptocurrency grows in popularity, more people are turning to what is known as mining as a way to bring in some extra income. However, not all mining activities are equal; small differences in the facts and circumstances can have substantial impact on the tax consequences.

Much of the nuance hinges on whether the activity is a trade or business under Section 162, which, in many circumstances, may not be a simple thing to determine.

If you choose to treat your mining as a business, earned bitcoin is reported on a Form 1040 Schedule C. The benefit of this is the ability to deduct mining expenses as deductions for your crypto business. Along with direct costs to mine the digital currency, treating the work as a business opens the door to additional tax reduction strategies.

To learn how to maximize your crypto mining activity, keep reading.

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On the Road Again – Tax Savings for the Recreational Vehicle

There is no better time than a multi-year worldwide pandemic to reevaluate the 9 to 5 office grind. Many people are realizing it was never actually necessary to work from a fixed location as long as they have a laptop and an internet connection. So why not take the show on the road? Hop in an RV and head out to see the country and work from wherever you like that day. It’s a great plan, but what does it mean for your taxes? Is your RV a business vehicle or is it a lodging that happens to be on wheels? Buckle up and let’s find out which is best to save you the most money.

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Office in Home - Real Estate

Office in the Home – Real Estate

As many of us become more accustomed to working from home, it is easy to forget that some industries were regularly working remotely prior to the COVID-19 pandemic. It might be easy to forget altogether that real estate businesses also qualify for the same deductions as other businesses. Yet, it is often easy to overlook something like a home office for a real estate rental operation, but the home office typically functions as the glue holding these businesses together.

To learn more about the how and the where to grab this deduction, keep reading.

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Office In Home - Partnerships

Office in the Home – Partnerships

The COVID-19 pandemic has altered many aspects of our society, perhaps permanently. One of these is the need to physically go to the office to get work done. Like all businesses, partnerships are no exception. While the Tax Cuts and Jobs Act of 2017 (TCJA) suspended this deduction for employees of the partnership until 2025 . However, partners may still take advantage of this often-overlooked tax benefit. The key is in how to report it. Read on to learn how!

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Office in the Home

Office in the Home

2020 saw a huge increase in taxpayers working from home. A good internet connection can allow taxpayers in many industries to work almost anywhere. Whether it is because the typical workspace has closed or there’s a need to be home to care for a family member, the shift to working from home can come with substantial tax savings. Claiming the home office deduction allows the taxpayer to take a typically non-deductible expense and make it deductible, reducing the amount of income subject to tax.

The most important item to note is the Tax Cuts and Jobs Act of 2017 (TCJA) suspended this deduction for employees until 2025. However, this deduction is still available to taxpayers who are self-employed or independent contractors. (Some states may still allow a deduction for an employee).

While it’s not as easy as claiming the expenses and calling it a day, home office deductions provide fantastic ways to get a tax deduction for amounts you ordinarily would spend but are not eligible as write-offs. Keep reading to learn the details and how to deduct things like your homeowner’s association dues, security systems, and other home improvements.

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Joint vs Separate New Advantages

Joint vs. Separate Filing – New Advantages with the 2021 Stimulus

COVID-19 has affected every aspect of our lives, and tax filing status is no exception. Couples who have filed jointly for their entire marriage may find that for 2021 it is more beneficial to file separately. This is in large part thanks to the many stimulus bills the Congress passed in 2020 and 2021.

The addition of Economic Impact Payments (EIP) and the associated Recovery Rebate Credits (RRC) have complicated what was once a simple tax calculation to now include these additional factors. In some scenarios, a couple would pay more tax filing separately than if they filed jointly, but because of pandemic-related credits, end up with more money in their pockets. Filing separately is not without its own potential headaches, though. Keep reading to find out when to switch your filing status.

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Is Wrapping Cryptocurrency a Realization Event? Don’t Overpay!

I’ve been spending too much time thinking about wrapping. You might picture presents neatly wrapped under a Christmas tree, or surprise birthday gifts next to the cake, but I’m thinking of something very different: cryptocurrency token wrapping.

A wrapped token is a token that represents a cryptocurrency from another blockchain or token standard. A wrapped token can be used on certain non-native blockchains and redeemed in the future for the original currency. It is typically worth the same as the original cryptocurrency, but when it isn’t, the question arises that when you exchange virtual currency for other property (including other virtual currency) is there tax due, and if so, how much?

Like many areas of cryptocurrency tax, the IRS has yet to issue guidance on this topic, resulting in taxpayers having to fend for themselves. The primary question you need to answer is, “Is wrapping cryptocurrency a realization event?” The answer to this question will influence the ultimate tax treatment.

Keep reading to learn more.

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Is Trader Tax Status Worth It?

As we navigate a world with COVID-19, large swings in the stock market have become the norm. Many buy and hold-style investors are more actively managing their portfolios to take advantage of these swings. The IRS has a special trader status for taxpayers who frequently engage in trading. This status includes a special accounting method, not available to the average investor, that can come with substantial tax savings. The status allows an investor to make special deductions and opens the door to a wide range of tax reduction strategies unavailable to the casual investor. However, with potential savings also come risks that could end up costing the taxpayer/trader more than the average investor. Weighing the pros and cons of this status is crucial in minimizing tax liability. The big question for tax planning is this — does obtaining trader tax status result in less tax?

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Five Tax Reduction Strategies for the Casual Cryptocurrency Owner

With so many people looking for more ways to make money outside their 9 to 5 jobs, many are turning to money making methods using technology including trading in cryptocurrency.
For tax purposes, the IRS considers cryptocurrencies property, not as currency. Just like other property types, stocks, investments, or real estate, when you sell, swap, or otherwise dispose of your cryptocurrency for more or less than you acquired it for, you incur a tax reporting obligation.
As an example, there would be a $1,000 capital gain if 0.1 bitcoin is bought for $2,000 in June of 2020 and then sold for $3,000 two months later. This profit must be reported on the tax return and a certain amount of tax is due on the gain, depending on the tax bracket of the taxpayer. In this example, the gain would be short term requiring the profit to be taxed at the filer’s ordinary tax rate. These rates range anywhere from 0-37%.

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Don’t Overpay: Determining the Fair Market Value of Cryptocurrency Airdrops

To the non-crypto enthusiast, the term “airdrop” may conjure an image of a pallet of relief supplies parachuting in from above. In the cryptocurrency world, the term has a very different meaning, but conjures the same mental image.

In the simplest terms, a crypto airdrop is a token that appears in your wallet without being purchased, although in some cases additional actions may be necessary to facilitate the transfer of the asset.

An airdrop can take several different forms, the most basic of which is an unsolicited token that simply shows up in your wallet. This is typically done as a marketing campaign, to try to expand the user base of a new project. Generally, only a nominal amount of the token is distributed.

Many times, this type of airdrop is done maliciously as part of a phishing or dusting attack. The vast majority of these airdrops are unwanted; they function as cryptocurrency’s version of “junk mail.”

Other airdrops are used to reward users of a particular protocol for their past behavior. Typically, this will take the form of a governance token or some other newly minted token.

Occasionally, the new token will automatically be deposited in the recipient’s wallet, but most of the time the user will need to connect their wallet to a website and actively claim the reward.

You may also be required to pay a gas fee to enable the transfer. Many airdrops of this type contain tokens of substantial value, so proper determination of when receipt takes place and what the fair market value (FMV) is can have considerable impact to tax.

While the two previous examples are the most common form of airdrops, they are not limited to the above. In practice, any unsolicited token received is generally considered an airdrop. This can also apply to non-fungible token (NFT) and game-based environments.

Small differences in the facts and circumstances of the airdrop may have outsized impacts on taxability and your planning opportunities. Keep reading to learn more.

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Don’t Overpay Tax on Crypto Forks and Airdrops

Practically overnight, cryptocurrency has gone mainstream, with more and more investors funneling money into Bitcoin, Dogecoin, and other cryptocurrencies. The IRS has responded with increased interest and scrutiny, demonstrated by the addition of the cryptocurrency question on the front page of 1040.

Whether you have invested in cryptocurrency or not, you are required to answer this tax return question. Many investors choose to take the most conservative position to avoid future correspondence from the IRS but trying to avoid a letter is no reason to pay more tax than necessary.

Keep reading to learn more!

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Don’t Overpay Tax on Crypto Forks and Airdrops

Practically overnight, cryptocurrency has gone mainstream, with more and more investors funneling money into Bitcoin, Dogecoin, and other cryptocurrencies. The IRS has responded with increased interest and scrutiny, demonstrated by the addition of the cryptocurrency question on the front page of 1040.

Whether you have invested in cryptocurrency or not, you are required to answer this tax return question. Many investors choose to take the most conservative position to avoid future correspondence from the IRS but trying to avoid a letter is no reason to pay more tax than necessary! After all, the Supreme Court has long held that a taxpayer has the right to do everything possible under the law to reduce tax.

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Dont Overpay On Crypto 1099-K

Don’t Overpay on the Crypto 1099-K

As cryptocurrency grows in popularity, so do the complications of tax reporting. At present, there is no consistent 1099 reporting for crypto transactions.

This is primarily because no 1099 form currently exists to adequately report cryptocurrency. The IRS has yet to issue third party reporting requirements to exchanges, so companies must determine on their own what information to report to the IRS and how they will report it.

Some exchanges will attempt to report transactions on a traditional 1099-B, but the easily accessible transferability of crypto makes it nearly impossible for an exchange to correctly report basis information.

Incorrect reporting can result in the IRS sending an unnecessary CP2000 notice, which can be both expensive and time-consuming for the taxpayer to resolve.

Other exchanges issue a 1099-Misc for certain transactions, but again this doesn’t reflect the full picture. Some exchanges choose to issue a 1099-K to customers, showing only the gross proceeds of crypto transactions and also doesn’t show the full picture.

Here’s what to do to avoid getting a dreaded notice from the IRS.

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Cryptocurrency Staking and the U.S. Tax Code

Cryptocurrency is currently one of the hottest topics in taxation. The use cases of crypto are continually evolving, and official IRS guidance is perpetually several years behind the types of transactions investors engage in. We are left trying to force a crypto transaction to fit into the existing code that was not written with crypto in mind. Additionally, with the lack of official guidance, we are forced to attempt to anticipate how the IRS will interpret novel transactions or worry about potential penalties and interest down the road. Staking is a transaction that has become extremely common among crypto users, yet the IRS is silent on how to report and tax it.

Read on to learn more about cryptocurrency “mining”, staking, and how the current IRS interpretations of the tax code (or lack thereof) may affect your income reporting.

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Cryptocurrency Due Diligence for the Circular 230 Professional

Many tax professionals cringe at the thought of a client coming to them with cryptocurrency transactions. However, a May 2021 NASDAQ survey shows that 17 percent of American adults own crypto, making it harder for tax pros to avoid.

It may soon be inevitable that practitioners will need to process cryptocurrency transactions. IRS Circular 230 requires practitioners to “possess the necessary competence” and to “exercise due diligence” in the return they prepare. Failure to meet these provisions could result in the taxpayer unnecessarily overpaying tax.

What exactly does that require? Read on to find out!

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CURRENT EDITION

Make Tax Magic with a Health Savings Account

Congress created one of the best tax savings vehicles in 2003. It wasn’t the individual retirement account (IRA). It wasn’t the Roth IRA.It was the health savings account (HSA). The HSA is the only tax-preferred savings vehicle in which a taxpayer potentially gets both an upfront tax deduction in addition to tax-free and penalty-free distributions.

The IRS wrote the HSA rules to give taxpayers maximum flexibility in how they use their HSAs for medical expenses. Strategic use of the HSA can lead to lifelong tax savings opportunities.

Let’s review the basic rules as to how an HSA operates, the little-known rules that create tax savings opportunities, and examples of how the HSA can be used to provide tax-free and penalty-free distributions when the taxpayer has a cash need.

Enjoy Decades of Tax-Free Growth With a 529A

If you’re disabled or support someone who is, a 529A plan can be a powerful way to save for the future. Potential earnings grow tax-free, and you won’t have to pay taxes when you withdraw, as long as the withdrawals meet qualifications.

Also known as Qualified ABLE (Achieving a Better Life Experience) programs, these will not only assist you next time you are playing Tax Code Jeopardy but help you create a tax advantaged savings account.

One reason you may not hear much about these tax vehicles is that there really is no way I can discern that advisers can make money on them. But since you and I are members of the same club as tax practitioners, I’m confident you will tell your clients about things that can help regardless of whether there is any profit in it. As my first managing partner the late Herb Cohan used to say, “The world is longer than a day.”

To learn more about future tax-free money, keep reading.

Maximizing Your Home Office Deduction

Question: Can I avoid depreciation recapture by not claiming it before I sell?

Answer: Nice try. You may save yourself unnecessary worry and fear about so-called recapture, but it won’t save you any tax impact when you do sell. If you want to learn the truth about depreciation, keep reading to learn more.

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  • Avoiding Passive Loss Limitations Through Short-term and Alternative Rentals

    Short-term rentals like AirBnb are becoming increasingly popular with taxpayers who invest in real estate. For many taxpayers, the appeal of these properties is the flexibility and cash flow potential. However, there may be an overlooked third tax benefit. In many situations these short-term rentals may not qualify as a rental activity to the IRS, and that may offer a big tax break. While many rental activities generate losses, this can leave taxpayers facing the frustrations of not always getting to deduct those losses right away due to the passive activity limitations.

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    How Business Owners Can Boost Income by Avoiding the $10,000 SALT Cap

    Taxpayers have been whipsawed by confusing rules for the $10,000 limit on deducting state and local taxes (SALT), the most politically charged piece of the Tax Cuts and Jobs Act (TCJA) of 2017. The cap has caused nearly 11 million individuals to lose an annual deduction worth $323 billion. But many owners of private businesses known as passthroughs can avert that financial pain. If you own your company and thus report your business income on your personal federal income tax return, here’s what you need to know.

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    GOFUNDME & KICKSTARTER: TAXABLE? DEDUCTIBLE?

    Millions of taxpayers in the United States are using crowdfunding websites like GoFundMe and Kickstarter to raise money for important needs, such as paying medical bills, paying legal fees, or funding a new business venture. Both the IRS and the courts have been surprisingly silent on the tax consequences of crowdfunding platforms. The good news is that established tax law provides a clear road map for answering most tax questions created by raising money from a crowdfunding website. By knowing these rules, taxpayers can use crowdfunding to raise cash and minimize their overall tax exposure.

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    My Client Stuck with a Mistaken C Corporation Election?

    My client formed three limited liability companies (LLCs) to hold his rental properties. Without consulting me, he filed Form 8832, Entity Classification Election, to elect C corporation treatment, effective January 1, 2020, for these LLCs. I want the LLCs to be disregarded entities, which is the most tax-efficient structure for his situation. What is the best way to undo these elections?

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    Quick Guide to Claiming Work-From-Home COVID-19 Expenses to Reduce Your Tax Bill

    This information is particularly important if you are the owner/shareholder of your own corporation – C or S corp. You can set up payroll and designate tax-free reimbursements for you to be working at home – as well other tax-free money for you and for your employees. (We will discuss employees momentarily. Yes, it’s essential.) If being an employee is your main source of income – watch out! The short answer to employees claiming an office in home deduction this year is... There is no deduction!

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    Five Tax Reduction Strategies for the Casual Cryptocurrency Owner

    With so many people looking for more ways to make money outside their 9 to 5 jobs, many are turning to money making methods using technology including trading in cryptocurrency. For tax purposes, the IRS considers cryptocurrencies property, not as currency. Just like other property types, stocks, investments, or real estate, when you sell, swap, or otherwise dispose of your cryptocurrency for more or less than you acquired it for, you incur a tax reporting obligation. As an example, there would be a $1,000 capital gain if 0.1 bitcoin is bought for $2,000 in June of 2020 and then sold for $3,000 two months later. This profit must be reported on the tax return and a certain amount of tax is due on the gain, depending on the tax bracket of the taxpayer. In this example, the gain would be short term requiring the profit to be taxed at the filer’s ordinary tax rate. These rates range anywhere from 0-37%.

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    Extra Taxes on S Corporation Distribution?

    My client plans to take about $15,000 in distributions in excess of his basis from his S corporation construction business. I know this generates tax for him. He’s in the 32 percent tax bracket and single. Does he also have to pay the 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax on this amount? Is there a way for him to avoid taxes on this amount?

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    Reduce Taxable Income Up to $25,000 with Passive Rental Losses

    You have likely heard that owning rental real estate provides great tax benefits. This is true for a multitude of reasons, but there’s one benefit that is arguably the best of the bunch: The Small Taxpayer Allowance for Deducting Passive Rental Losses. Based on average household income levels, more than three-quarters of taxpayers can potentially qualify for this fantastic tax benefit that offers taxable income reduction of up to $25,000.

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