Jan 17

Counting Cryptocurrency Gains And Losses Without Running Afoul Of IRS Rules

Here’s another article from Forbes.com from Adam Bergman, talking about cryptocurrencies –

2017 is viewed by many as the year of the crypto. However, with the increase in popularity and surge in value of cryptocurrencies, a significant number of cryptocurrency investors are now finding themselves in the uncomfortable position of trying to determine what, if any, is their tax liability attributable to their 2017 cryptocurrency transactions. The heightened level of taxpayer concern with correctly reporting the tax liability associated with their transactions can be directly associated to the John Doe summons the Internal Revenue Service (IRS) issued to Coinbase, one of the largest cryptocurrency exchanges in the United States.

The IRS is concerned that many U.S. taxpayers may not be accurately reporting the gains or income they have generated from their cryptocurrency transactions. Since the majority of cryptocurrency transactions have likely resulted in significant gains due to the surge in value in most cryptocurrencies, coupled with the fact that the gains are likely short-term capital gains (subject to ordinary income tax rates) since the cryptocurrencies were likely held less than 12 months, the IRS has good reason to be concerned.

As a result, in a petition filed November 17, 2016 with the U.S. District Court for the Northern District of California, the U.S. Department of Justice (DOJ) asked the court for a John Doe summons to be issued to Coinbase. The John Doe summons would require Coinbase to provide the DOJ with information related to all Bitcoin transactions it processed between 2013 and 2015. The DOJ would then share the information received with the IRS to be matched against filed tax returns. The IRS summons power is extremely broad and has been protected by the courts over the years. However, Coinbase actually had some success defending the John Doe summons issued by the IRS and was able to limit its demand to ask only for accounts that conducted Bitcoin transactions (either exchanging Bitcoin for dollars or sending or receiving coins from another Bitcoin user) worth $20,000 or more between 2013-2015.

IRS Notice 2014-21 stated clearly that for federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. In addition, the Notice made it clear that virtual currency is not treated as a currency for tax purposes. The Notice then confirmed that cryptocurrency would be treated as a capital asset. IRS Notice 2014-21 holds that cryptocurrencies, such as Bitcoins, will be considered property, which is a capital asset and subject to the capital gains tax rules so long as it’s not held for business purposes.

As long as one holds cryptocurrencies for personal or investment purposes, any gain/loss from the sale of the cryptocurrency would be subject to the capital gains tax regime. If the cryptocurrency was held for less than twelve months (short-term capital gains), then ordinary income tax rates would apply. Whereas, if the cryptocurrency were held for twelve months or more, the favorable long-term capital gains rate would apply. The determination of a taxpayer’s overall net capital gain or loss is based on a netting formula involving all capital (cryptocurrency) transactions during the year, with the short-term gains netted against the short-term losses and the long-term gains netted against long-term capital losses. However, if one was considered in the business of trading cryptocurrencies or mining cryptocurrencies, they could be subject to the ordinary income tax rate.

The tax law divides capital gains into two different classes determined by the calendar. Short-term gains come from the sale of property owned one year or less; long-term gains come from the sale of property held more than one year. Short-term gains are taxed at your maximum ordinary income tax rate, where the maximum tax rate was lowered to 37% under the Trump tax plan. Most long-term gains are taxed at either 0%, 15%, or 20% and can be subject to the additional 3.8% tax under Obamacare. For lower-bracket taxpayers, the long-term capital gains rate is 0%.

There are exceptions, of course. The long-term capital gains rates were not impacted by the Trump tax plan. In order to determine whether your capital gains transaction will be subject to the short-term or long-term capital gains tax rules, one will need to determine their holding period. The holding period in connection with the capital asset transaction is the period of time that you owned the property before sale. When figuring the holding period, the day you bought property does not count, but the day you sold it does. So, if you bought a Bitcoin on April 20, 2017, your holding period began on April 21, 2017. Thus, April 20, 2018 would mark one year of ownership for tax purposes. If you sold on that day, you would have a short-term gain or loss. A sale one day later on April 21 would produce long-term tax consequences, since you would have held the asset for more than one year. The tax rate you pay depends on whether your gain is short-term or long-term.

On the other hand, a capital loss is a loss on the sale of a capital asset, such as a stock, mutual fund, real estate, or cryptocurrency. As with capital gains, capital losses are divided by the calendar into short-term and long-term losses and can be deducted against capital gains, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss from a cryptocurrency investment and only $1,000 of short-term gain from a cryptocurrency investment, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).

If a taxpayer makes a number of stock or cryptocurrency trades in a particular year, the end result could be a mix of long-term and short-term capital gains and losses. If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income, for example. Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income. If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.

Since the IRS has treated cryptocurrencies as property for tax purposes and the SEC has indicated it should be treated as a security, it is believed that an individual taxpayer can generally determine whether they will be using the specific indication method, which lets one identify the specific cryptocurrency to be sold, or the first-in-first out (FIFO) method for determining the cost basis of the cryptocurrency. The FIFO is the default accounting method by the IRS, unless one has records to support another method. The specific identification option is the method likely to give one the most flexibility and potentially the best tax result. The net capital gain or loss is reported on the individual taxpayer’s federal income tax return (IRS Form 1040 – Schedule D).

It is important to remember that each time you sell or exchange a cryptocurrency for either cash, another cryptocurrency, or for goods or services, the transaction would be considered a taxable event, which would be subject to either, short-term or long-term capital gain/losses based on the basis (what you paid for the crypto), holding period, and the price the cryptocurrency was sold or exchanged for. Moreover, if the transaction was part of a business, such as mining activity, the applicable corporate or ordinary income tax rates would apply. The good news is that new mobile applications and wallets are available that can help taxpayers keep track of the necessary tax reporting information needed to properly calculate and report their tax liability with respect to their cryptocurrency transactions during the year.

In sum, as long as one purchases cryptocurrencies for personal or investment purposes, any gain/loss from the sale or exchange or the cryptocurrency would be subject to the capital gains tax regime. If the cryptocurrency was held less than twelve months, then ordinary income tax rates would apply and if the cryptocurrency were held for twelve months or more, the favorable long-term capital gains rate would apply. The total short-term and/or long-term tax due or loss recognized would be determined based off a netting formula. However, if one is considered in the business of trading cryptocurrencies or mining cryptocurrencies, the taxpayer could be subject to ordinary income tax rates.

Investing in cryptocurrencies can be a risky and speculative investment option. Nevertheless, with the potential for financial success comes real and complex tax reporting obligations. It is important to consult with a tax adviser when navigating the cryptocurrency-related tax reporting rules.

For more information about investing in cryptocurrencies, please contact us @ 800.472.0646 today!

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Jan 07

What You Should Know About Taxation Of Cryptocurrencies

This article originally appeared on Forbes.com

If you spend or invest in virtual currencies, it is crucial to understand how virtual currency transactions are treated for tax purposes.

IRS Notice 2014-21

The IRS addressed the taxation of virtual currency transactions in Notice 2014-21. According to the Notice, virtual currency is treated as property for federal tax purposes. This means that, depending on the taxpayer’s circumstances, cryptocurrencies, such as Bitcoin, can be classified as business property, investment property, or personal property. General tax principles applicable to property transactions must be applied to exchanges of cryptocurrencies. Hence, Notice 2014-21 holds that taxpayers recognize gain or loss on the exchange of cryptocurrency for other property.  Accordingly, gain or loss is recognized every time that Bitcoin is used to purchase goods or services.

Determining Basis & Gain

When it comes to determining the taxation of cryptocurrency transactions, it is important for cryptocurrency owners to properly track basis. Basis is generally defined as the price the taxpayer paid for the cryptocurrency asset.

For example, on June 1 2017, Jane purchased five Bitcoins for $6,000 ($1,200 each Bitcoin). On November 1, 2017, she used one Bitcoin to purchase $2,000 worth of merchandise via an online retailer. Jane recognized an $800 gain on the transaction ($2,000 amount realized – $1,200 basis in one Bitcoin).

Treating cryptocurrency, such as Bitcoin, as property creates a potential accounting challenge for taxpayers who use it for everyday purchases because a taxable transaction occurs every time that a cryptocurrency is exchanged for goods or services. For example, if Jane purchased a slice of pizza with one Bitcoin that she purchased on June 1 2017, she would have to determine the basis of the Bitcoin and then subtract that by the cost of the slice of pizza to determine if any gain was recognized. There is currently no “de minimis” exception to this gain or loss recognition. Taxpayers must track their cryptocurrency basis continuously to report the gain or loss recognized on each crypto transaction properly. It is easy to see how this treatment can cause accounting issues with respect to everyday cryptocurrency transactions.

On the other hand, the loss recognition on cryptocurrency transactions is equally complex. A deduction is allowed only for losses incurred in a trade or business or on a transaction entered into for profit. If Jane had recognized a $100 loss on her purchase of merchandise from the online retailer, the loss may not be deductible. If Jane uses Bitcoin for everyday transactions and does not hold it for investment, her loss is a nondeductible personal loss. However, if she holds Bitcoin for investment and cashes out of her investment by using Bitcoin to purchase merchandise, her loss is a deductible investment loss. Whether Bitcoin is held for investment or personal purposes may be difficult to determine, and further guidance by the IRS on this topic is needed.

Cryptocurrency values have been extremely volatile since its inception. As illustrated below, this volatility makes a significant difference in gain or loss recognition.

Jane purchased four Bitcoins on February 2, 2017 for $1,120 per Bitcoin, ten Ethereum coins on March 10, 2017 for $320 per coin, and 65 Litecoins on July 5, 2017 for $65 per coin.  Jane would need to keep track of the basis and sales price for each cryptocurrency transaction in order to properly calculate the gain or loss for each transaction.  In addition, if Jane purchased Bitcoins at different dates and at different prices, at sale, Jane would have to determine whether she would be selling a specific Bitcoin or use the first-in, first-out (FIFO) method to determine any potential gain or loss. The default rule for tracking basis in securities is FIFO. Taxpayers can also determine basis in securities by using the last-in, first out (LIFO), average cost, or specific identification methods. The prevalent thought is that these methods should be available for property that does not qualify as a security, and that taxpayers investing in cryptocurrency should use the method that is most beneficial to them. However, no direct IRS authority supports this position.

In sum, taxpayers must track their cryptocurrency purchases carefully. Each cryptocurrency purchase should be kept in a separate online wallet and appropriate records should be maintained to document when the wallet was established. If a taxpayer uses an account with several different wallet addresses and that account is later combined into a single wallet, it may become difficult to determine the original basis of each cryptocurrency that is used in a subsequent transaction.

The details of all cryptocurrency transactions in a network are stored in a public ledger called a “Blockchain,” which permanently records all transactions to and from online wallet addresses, including date and time. Taxpayers can use this information to determine their basis and holding period. Technology to assist taxpayers in this process is being developed currently and some helpful online tools are now available.

Characterization of Gain or Loss for Cryptocurrency Transactions

The character of gain or loss on a cryptocurrency transaction depends on whether the cryptocurrency is a capital asset in the taxpayer’s hands. Gain on the sale of a cryptocurrency that qualifies as a capital asset is netted with other capital gains and losses. A net long-term capital gain that includes gain on crypto transactions is eligible for the preferential tax rates on long-term capital gains, which is 15% or 20% for high net-worth taxpayers. Cryptocurrency gain constitutes unearned income for purposes of the unearned income Medicare contributions tax introduced as part of the Affordable Care Act. As a result, taxpayers with modified adjusted gross incomes over $200,000 ($250,000 for married taxpayers filing jointly) are subject to an additional 3.8% tax on cryptocurrency gain.

For example, on August 1, 2017, Jen, a sole proprietor, digitally accepts two Bitcoins from Steve as payment for services. On that date, Bitcoins are worth $10,000 each, as listed by Coinbase. Therefore, Jen recognizes $20,000 ($10,000 x 2) of business income. A month later, when Bitcoins are trading for $11,500 on the Coinbase exchange, Jen uses two Bitcoins to purchase supplies for her business. At that time, Jen will recognize $23,000 ($11,500 x 2) in business expense and $3,000 [($11,500 – $10,000) x 2] of gain due to the Bitcoin exchange. Since Jen isn’t in the trade or business of selling Bitcoins, the $3,000 gain is capital in nature.

Now let’s assume the same facts as above, except that Jen uses the two Bitcoins to purchase a new car for her personal use. According to the Coinbase exchange, Bitcoins are now trading at $8000. Jen will realize a loss of $4000 [($8000 – $10,000) x 2]. However, this loss is considered a nondeductible capital loss because Jen didn’t use the Bitcoins for investment or business purposes.  It is important to note that a payment using cryptocurrencies are subject to information reporting to the same extent as any other payment made in property. Thus, a person who, in the course of a trade or business, makes a payment using cryptocurrency with a fair market value of $600 or more is required to report the payment to the IRS and the payee’s cryptocurrency payments are subject to backup withholding. This means that persons making reportable payments with cryptocurrency must solicit a Taxpayer Identification Number (TIN) from the payee. If a TIN isn’t obtained prior to payment, or if a notification is received from the IRS that backup withholding is required, the payer must backup withhold from the virtual currency payment.

In summary, if a taxpayer acquires cryptocurrency as an investment and chooses to dispose of it by purchasing merchandise or services, any loss realized will be treated as a deductible investment loss. However, at times, it may be difficult to determine whether cryptocurrency is held for investment or personal purposes.

Employment Taxes and Information Reporting – Cryptocurrency Mining

According to Notice 2014-21, if a taxpayer’s mining of cryptocurrency is a trade or business, and the taxpayer isn’t classified as an employee, the net earnings from self-employment resulting from the activity will be subject to self-employment tax. Cryptocurrency mining is defined as a computationally intensive process that computers comprising a cryptocurrency network complete to verify the transaction record, called the “Blockchain”, and receive digital coins in return.  Cryptocurrency mining is considered a trade or business for tax purposes, in contrast to investing in cryptocurrencies which is considered an investment.  This is a crucial distinction since the taxation of investment gains or losses are subject to the capital gain/loss tax regime, whereas, business income is subject to a different tax regime.  A taxpayer generally realizes ordinary income on the sale or exchange of a cryptocurrency that is not a capital asset in his hands.

Inventory and property held for sale to customers are not capital assets, so income recognized by a miner of, or broker in, cryptocurrency is generally considered ordinary. If a taxpayer’s mining of cryptocurrency constitutes a trade or business, the net earnings from mining (gross income less allowable deductions) are subject to self-employment tax. Similarly, if an independent contractor receives virtual currency for performing services, the fair market value of such currency will be subject to self-employment tax. If cryptocurrency is paid by an employer to an employee as wages, the fair market value of the currency will be subject to federal income tax withholding, FICA and FUTA taxes, and must be reported on Form W-2 (Wage and Tax Statement).

Questions Remain

The IRS’s guidance in Notice 2014-21 clarifies various aspects of the tax treatment of cryptocurrency transactions. However, many questions remain unanswered, such as how cryptocurrencies should be treated for international tax reporting (FBAR & FATCA reporting) and whether cryptocurrencies should be subject to the like-kind exchange rules.

For more information about investing in cryptocurrencies, including Bitcoin, please contact us @ 800.472.0646.

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Oct 19

Factors To Consider When Contemplating A ‘Backdoor’ Roth IRA

The following article, written by Adam Bergman, originally appeared on Forbes.com –

There have been no income level restrictions for making Roth IRA conversions since 2010, hence a high income earner can do a conversion of after-tax (non-deductible) IRA funds to a Roth IRA, which is known as a ‘backdoor’ Roth IRA. In other words, the ‘backdoor’ IRA allows a high- income earner, who has exceeded the Roth IRA annual income contribution limits, to circumvent those rules and make a Roth IRA contribution. However, as detailed below, a tax could be due on the conversion under the pro rata (aggregation) rules if the IRA holder has other traditional pre-tax IRAs that have not been taxed. In general, the taxes owed on the conversion will depend on the ratio of IRA assets that have been taxed to those that have not, making the ‘backdoor’ IRA unattractive for some.


A regular contribution to a Roth IRA is generally limited to the lesser of the annual contribution limit or 100 percent of the individual’s compensation. The Roth IRA contribution limit is the same as the traditional IRA limit. For the year 2017, the annual contribution limit for an individual under the age of 50 is $5,500, and $6,500 for an individual over the age of 50.

An individual making Roth IRA contributions must reduce those contributions by the amount of any contributions made to a traditional IRA.  However, not all individual taxpayers are eligible to make Roth IRA contributions.  For taxpayer’s filing as single, one must have a modified adjusted gross income under $133,000 to contribute to a Roth IRA for the 2017 tax year, but contributions are reduced starting at $118,000.  Taxpayers filing as married, the combined modified adjusted gross income must be less than $196,000, with reductions beginning at $186,000.

Before considering a “backdoor” Roth IRA strategy, there are a number of important items to consider.  The first is the concept of the IRA pro rata aggregation rules.  Under Internal Revenue Code Section 408(d)(2), the aggregation rules hold that when an individual has multiple pre-tax IRAs, they will all be treated as one account when determining the tax consequences of any distributions (including a distribution out of the account for a Roth conversion). In other words, the aggregation rules can cause issues for individuals looking to take advantage of the ‘backdoor’ Roth IRA strategy that have multiple IRA accounts.

For example, Amy has $100,000 of existing pre-tax IRA assets across multiple IRA accounts. Amy now makes over $200,000 so is not eligible to make a Roth IRA contribution for this year. Amy wishes to make a $5,500 Roth IRA contribution by taking advantage of the ‘backdoor’ Roth IRA strategy, which involves making a non-deductible IRA contribution and then converting those funds into a Roth IRA.  However, since Amy has $100,000 of pre-tax IRA funds prior to the Roth IRA conversion, the aggregation rules will limit how much Amy can convert to a Roth IRA.

If Amy attempted to do a $5,500 Roth conversion (from combined IRA funds that now total $100,000 plus new $5,500 contribution equals $105,500), the return-of-after-tax portion will be only $5,500 / 105,500 = 5.2%. Which means the net result of his $5,500 Roth conversion will be $286 of after-tax funds that are converted, $5,214 of the conversion will be taxable, and she will end out with a $5,500 Roth IRA and $100,000 of pre-tax IRAs that still have $5,214 of related after-tax contributions. Hence, the net result of the IRA pro rata attribution rules is that a large portion of the after-tax funds linked with the new after-tax IRA contribution will not end up in the Roth IRA and will instead be connected with the existing pre-tax IRA funds.

Based on the example, the IRA attribution rules significantly limited the tax benefit of the ‘backdoor” Roth strategy for Amy as only a very small amount of the $5,500 after-tax funds were able to be converted tax-free to the Roth IRA. In addition, the IRA attribution rules only apply to pre-tax IRAs of the taxpayer, not his or her spouse, inherited IRAs, or any employer retirement plans (i.e. 401(k)), which can offer some interesting tax planning opportunities.

In addition to being mindful of the IRA attribution rules when considering a ‘backdoor’ Roth IRA conversion, one must also consider the step-transaction-doctrine. The step-transaction doctrine, which arose from a Supreme Court case, holds that a court can invalidate a transaction if the separate steps involved in the transaction have no independent substantial business purpose. In the context of the ‘backdoor’ Roth IRA strategy, the thinking goes that if the separate steps of the non-deductible IRA contribution and subsequent Roth conversion are done too quickly or simultaneously there is some risk the IRS could attempt to invoke the step-transaction doctrine in order to invalidate the Roth conversion.

There is no court precedent for this position, but many tax experts believe it would be wise to wait some time in between the nondeductible IRA contribution and the subsequent Roth conversion. There is also no firm rule for how long one should wait after the nondeductible contribution is made before making the Roth IRA conversion, but waiting a few months and having the IRA funds invested during the waiting period is thought to be sufficient.

Since 2010, the ‘backdoor’ Roth IRA strategy has been viewed as an attractive way for many high income earners to take advantage of the power of the Roth IRA.  Below are some tips to consider before doing a ‘backdoor’ Roth IRA:

  • Understand the Roth IRA contribution income limits for the taxable year in question
  • Determine whether you have any existing pre-tax IRA funds. If so, understanding the IRA attribution rules under Internal Revenue Code Section 408(d) is crucial
  • Are you currently participating in an employer retirement plan? If so, rolling over existing pre-tax IRA funds to an employer plan may help you circumvent the IRA attribution rules.
  • Be mindful of the step-transaction doctrine and consider waiting at least several months between the non-deductible contribution and the Roth IRA conversion
  • Consider not documenting that you are doing a ‘backdoor’ Roth IRA strategy.

It is unclear how long the ‘backdoor’ Roth IRA strategy will continue to be permitted. President Obama’s 2016 budget recommendations did attempt to end it, but the recommendation did not become law.  It is unclear what the Trump Administration’s position is with respect to it.  However, for now, the ‘backdoor’ IRA strategy continues to be a very popular way for high income earners to make Roth IRA contributions.

For more information about the ‘Backdoor’ Roth IRA, please contact us @ 800.472.0646.

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Jul 26

What The Law Says About Unrelated Business Taxable Income In Non-Real Estate Investments

The following was written by our own Adam Bergman and appeared on Forbes.com

For many retirement account investors, understanding how the Unrelated Business Taxable Income Rules work, also known as UBTI, UBIT, or debt-financed income rules, and how they may potentially apply to one’s retirement account investment has been a challenge.  The main reason is that the majority of IRA or 401(k) plan investors invest in traditional types of investments, such as equities, mutual funds, and ETFs, which do not trigger the application of the UBTI tax rules since most passive investments that a retirement account might invest in are exempt from the UBTI rules, such as interest, dividends, and capital gains.

Understanding the potential impact of the UBTI rules is crucial for retirement account investors seeking to make non-real estate alternative investments in their retirement accounts, including options, stock short sales, and commodity futures contracts.  In general, the UBTI tax rules are triggered in three instances: (i) use of margin to buy stock, (ii) use of a nonrecourse loan to buy real estate, and (iii) investment in a business operated through a flow-through entity, such as an LLC or partnership.  The tax imposed by triggering the UBTI rules is quite steep and can go as high as 40 percent.

When it comes to non-real estate transactions, such as securities and other financial products involving retirement funds, understanding the application of the UBTI or debt-financed income rules have been somewhat difficult. Neither the Code nor the Treasury regulations define “indebtedness” for purposes of the debt-financed income rules. Generally, when a retirement account borrows funds and has a clear obligation to repay the funds, the debt-financed income rules are applicable. However, many financial product type investments that involve “leverage” but not a direct borrowing are not considered debt-financed property and are not subject to UBIT.

Below is a summary of how the UBTI/debt-financed income rules apply to some of the more common type of financial product investments involving retirement funds:

Purchase of Stock or Securities on Margin:  It is well established that the purchase of securities on margin gives rise to unrelated debt-financed income (Elliott Knitwear Profit Sharing Plan v. Commissioner, 614 F.2d 347 (3d Cir. 1980).

Repurchase Agreements:  In a repurchase agreement, one party (usually a bank) purchases securities from another party (the bank’s customer) and agrees to sell the securities back to the customer at an agreed price. Such transactions are treated as a loan of money secured by the securities and give rise to unrelated debt financed income (Rev. Rul. 74-27, 1974-1)

Securities Lending Transactions: IRC Section 514(c)(8) provides that payments with respect to securities loans are deemed to be derived from the securities loaned, not from collateral security or the investment of collateral security from such loans.

Short Sales of Stock: The IRS has ruled that neither the gain attributable to the decline in the price of the stock sold short nor the income earned on the proceeds of the short sale held as collateral by the broker constituted debt-financed income (Rev. Rul. 95-8, 1995-1)

Options: IRC Section 512(b)(5) excludes from UBTI all gains or losses recognized, in connection with an organization’s investment activities, from the lapse or termination of options to buy or sell securities.

Commodities Futures Transactions: The IRS has concluded that gains and losses from commodity futures contracts are excluded from UBTI under Code section 512(b)(5). The IRS has rules that the purchase of a long futures contract entailed no borrowing of money in the traditional sense.  Likewise, the IRS found a short contract was merely an executory contract because there was no property held by the short seller that produced income and thus there could be no acquisition indebtedness.

Notional Principal Contracts: The IRS has issued regulations providing that all income and gain from notional principal contracts is excluded from UBTI. (Treas. Reg. § 1.512(b)-1(a)(1).)

The Internal Revenue Code permits retirement account investors to make a wide range of financial product investments using retirement funds. While the majority of financial product type investments would not trigger the UBTI or debt-financed income rules, (including mutual funds and options) transactions involving margin, however, would likely trigger the tax.  The burden falls on the retirement account holder to make the determination of whether the financial product type transaction triggered the UBTI rules and, if so, file the IRS Form 990-T. Therefore, it is important to work with a tax professional who can help one evaluate the financial product transaction to determine whether the transaction will trigger the UBTI or debt-financed income rules tax.

For more information about the UBTI rules, please contact us @ 800.472.0646.

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Jul 07

New Fiduciary Rule Complicates Matters For Self-Directed IRA Private Fund Investors

Here’s another article from Forbes.com from our own Adam Bergman –

On June 9, 2017, the Department of Labor’s (DOL) final rule meaningfully expanded when a person is deemed to be treated as a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) as a result of providing investment advice.  The final rule was initially set to become applicable on April 10, 2017, but the DOL delayed the final rule’s applicability date for sixty days, until June 9, 2017 and also issued a new temporary enforcement policy for the transition period commencing on June 9th and ending on December 31, 2017.


Under the Fiduciary Rule, various marketing activities and investment “recommendations” that previously were not regarded as investment advice will now be treated as such.  In the context of private fund investments, the final rule affects common marketing and other related activities involving ERISA plan and/or individual retirement account (IRA) investors, prospective investors, clients and/or prospective clients. Anyone that engages in these activities will be considered advice fiduciaries of the retirement plan investors.  The rule was intended to increase safeguards for retail IRA investors, with the focus towards establishing fiduciary obligations on brokers and other advisors not previously subject to ERISA.  However, it is highly uncertain whether, and to what extent, the fiduciary rule would apply to private funds, such as private equity sponsors or hedge fund managers.

In general, private fund managers do not offer fiduciary investment advice, as they do not advise retirement plan investors on how to invest.  Whereas, they traditionally manage pooled assets from multiple investors, which may or may not include retirement investors. The new rule limits the definition of “recommendation” to communications to a specific advice recipient regarding the advisability of a particular investment or management decision.

Based on the way private funds are structured, they should not be subject to these new fiduciary rules when making investment decisions on behalf of the fund.  Private funds were likely not the intended target of these new rules, however, they could get pulled into the framework of the rules under certain circumstances, particularly for IRA investors. Private funds could avoid the rules by meeting at least one of two ERISA exceptions: (i) The Venture Capital Operating Company Exemption (the “VCOC”), or (ii) the 25% percent rule.

Both ERISA exceptions are complicated, but generally, under VCOC, an investment vehicle that holds at least 50 percent of assets invested in operating companies does not hold plan assets and if the retirement plan assets represent less than 25% of the fund equity, the funds is not treated as holding plan assets under ERISA.  If the fund meets one of these exceptions, then it would be deemed to not hold plan assets and the new fiduciary rules should not be triggered.  However, the new fiduciary rules created some uncertainly as to the application of the fiduciary rules for private funds to potential investors prior to the completion of the fund raising transaction.

For private funds, satisfying one of the two ERISA exemptions should limit their exposure to the new fiduciary rules once the fund has already been launched.  However, the majority of all marketing for private funds occur prior to the fund raising closing.  The application of the new fiduciary rules to the marketing of a new private fund is still quite unclear.  As a result, the DOJ expanded the definition of the so called “seller’s exception,” also known as the “expert fiduciary exclusion,” which was designed to exempt recommendations and materials provided to independent fiduciaries with financial expertise.

In order to take advantage of this exception, the potential investor must be an independent fiduciary with financial expertise, which would include (a) a bank, (b), an insurance company, (c) an entity registered as an investment adviser under the Investment Advisers Act of 1940 or registered as an investment adviser with the state in which it has its principal office, (d) a broker-dealer registered with the SEC, or (e) an independent fiduciary that holds, or has under management or control, at least $50 million.

For more information, please contact an IRA Expert @ 800.472.0646.

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Apr 23

Retirement And Educational Savings Tax Planning Tips To Lower Taxes In 2017

Here’s another article written by Adam Bergman for Forbes.com

Now that the tax filing deadline has passed for the 2016 tax year, this is a perfect time to start thinking about some simple ways to boost retirement savings and at the same time lower overall tax liability for 2017.

Start Thinking IRA: For 2017, the maximum IRA contribution is $5,500, or $6,500 if you are over the age of fifty. Contributions can generally be made in pre-tax, after-tax, or Roth.  A pre-tax IRA, also known as a traditional IRA, is one of the more popular ways to save for retirement that also offers tax advantages. Contributions made to a traditional IRA may be fully or partially deductible, depending on your circumstances, and, generally, amounts in a traditional IRA (including earnings and gains) are not taxed until distributed, which is not required until one reaches the age of 70 1/2.

Retirement And Educational Savings Tax Planning Tips To Lower Taxes In 2017An after-tax IRA, also known as a non-deductible IRA, is a traditional IRA that contains nondeductible contributions. Nondeductible contributions to traditional IRAs often occur when one makes too much to make a deductible contribution, or is limited because of employer 401(k) plan contributions. When one takes a distribution from an after-tax IRA, the portion of the distribution coming from nondeductible contributions is tax-free, although, any income and earnings generated from that after-tax contribution would be subject to tax, and a 10% early distribution penalty if the individual is under the age of 59 1/2.

A Roth IRA is an improved version of the after-tax nondeductible IRA.  Although one does not benefit from a tax deduction for contributions, all of the qualified distributions, including earnings, come out tax-free. To contribute to a Roth IRA, ones modified adjusted gross income must fall below the annual limits for your filing status (which is $196,000 if filing jointly for 2017). One can withdraw contributions any time, but must be 59 1/2 years old and you must have had a Roth IRA open for at least five tax years before one can withdraw income and gains without tax or penalty.

Business Owners Rejoice:  Owning a business in 2017 can have some significant retirement tax benefits, if one is aware of them. The scope of the benefits is somewhat dependent on whether the business has full-time employees other than the owners.  For example, a sole proprietor or a business entity with no full-time employees, may be eligible to contribute up to $54,000 ($60,000 if the participant is over the age of fifty), to a solo 401(k) plan in pre-tax, after-tax or Roth.  Whereas, if the business has non-owner full-time employees, the business owner’s total contribution may be limited due to the cost of offering maximum employer profit sharing contributions to all employees.  Nevertheless, business owners should consult with their tax advisor to examine how establishing an employer retirement plan, such as a 401(k) plan, SEP or SIMPLE IRA for their business could potentially help their retirement savings, as well as reduce their annual tax liability.

Get to Know the 529 Plan.  A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code. Nearly every state now has at least one 529 plan available, but the plan characteristics may differ by state.   529 plans are usually categorized as either prepaid or savings plans. In general, the tax advantages of establishing and funding a 529 plan is that earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. Contributions to a 529 plan, however, are not deductible. One may make a contribution of $14,000 a year or less to a 529 plan qualifies for the annual federal gift tax exclusion. Under special rules unique to 529 plans, one can gift a lump sum of up to $70,000 ($140,000 for joint gifts) and avoid federal gift tax, provided one makes an election to spread the gift evenly over five years Thus, establishing and funding a 529 plan may will not offer you an immediate tax deduction, but it will allow you to help your children afford college by having the contributions and earnings grow without tax over time, thereby, potentially allowing one to spend their retirement savings on other expenses.

HSA Triple Tax Benefit: IRC Section 223 allows individuals who are covered by a compatible health plan, often referred to as a High Deductible Health Plan (HDHP), to set aside funds on a tax-free basis up to the contribution limit to pay for certain out-of-pocket medical expenses. Health Savings Accounts have a triple tax benefit—funds go into the account tax-free, funds grow tax-free and remain completely tax-free when used for eligible medical expenses.  The IRS imposes certain requirements in order to be eligible to contribute to an HSA, such as one cannot be covered by Medicare.  The maximum 2017 contribution is $6750 for families, with a $1000 catch-up for individuals over the age of fifty-five.

Planning and saving for retirement does not have to be painful.  Understanding the rules and employing a consistent approach can help increase retirement savings while simultaneously reducing ones tax liability. However, a few simple retirement planning moves can help make the difference when April 17, 2018 rolls around.

For more information, please contact an IRA Expert @ 800.472.0646.

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Mar 23

Tax Filing Tips To Save On Taxes And Boost IRA Savings

The following was written by Adam Bergman and first appeared on Forbes.com

With the individual tax-filing deadline date of April 18, 2017 for the 2016 taxable year quickly approaching, reviewing some of the ways one can save taxes as well as boost his or her retirement savings is always helpful.  Below are a few ways one can use the IRA contribution regime to help save taxes as well as enhance one’s retirement nest egg.

Tax Filing Tips To Save On Taxes And Boost IRA Savings

Still Time to Make IRA Contributions for 2016: The maximum IRA contribution is $5500 or $6500 if over the age of fifty and will remain the same for 2017 contributions. The deadline for making IRA or Roth IRA contributions for 2016 is April 18, 2017.  The contribution must be made by such date even if the taxpayer has filed an extension.  Contributions can be made in pre-tax, after-tax or Roth, if applicable.

Don’t Forget About Spousal IRA Contributions: Many married taxpayers are not aware that if one spouse is not working and the other spouse has earned sufficient income, the working spouse can make IRA contributions for the nonworking spouse.  In general, a nonworking spouse can make a deductible IRA contribution of up to $5,500 for 2016 ($6,500 if age 50 or older as of 12/31/16) as long as the couple files a joint return, and the working spouse has earned income that equals are exceeds the sum of the nonworking spouse’s contribution plus the working spouse’s contribution. However, if the working spouse is covered by a qualified retirement plan (via a job or self-employment), the deductibility of the nonworking spouse’s contribution is subject to phase-out based on joint adjusted gross income.

Be Aware of the Savers Tax Credit: Low- and moderate-income taxpayers are incentivized to save for retirement by becoming eligible to claim the saver’s credit, which can be worth up to $2,000 for individuals and $4,000 for couples. People age 18 and older who are not full-time students or dependents on someone else’s tax return can claim this tax credit until their adjusted gross income exceeds $62,000 for couples in 2016.

Not Too Late for Employer SEP IRA Contributions.  For sole proprietors or small business owners looking to make more substantial IRA contributions than $5500 or $6500, if over the age of 50, the SEP IRA could be your answer.  For 2016, an employer can make contributions to a SEP IRA up to the lessor of 25% (20% if sole proprietor or single member LLC) of the employee’s compensation or $53,000.  The limit increases to $54,000 for 2017.  SEP IRA contributions for the 2016 taxable year can be made by April 18, 2017 or up until the date of the tax filing extension date, if applicable.

Contributing to a pre-tax IRA or qualified retirement plan, such as a 401(k), can prove to be a great way of saving for retirement while at the same time reducing ones tax liability.  The IRA contribution regime was designed by Congress to incentivize Americans to save for retirement by granting a tax-deduction for the pre-tax IRA contribution as well as offering the ability to defer taxes on any IRA income/gains until a future date.  The good news is that there is still plenty of time for taxpayers to take advantage of these benefits.

For more information about IRA contributions, please contact us @ 800.472.0646.

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Feb 12

Trump, The Fiduciary Rule And Your IRA

This article originally appeared on Forbes.com, authored by Adam Bergman –

On February 3, 2017, President Trump announced that he will use a memorandum to ask the labor secretary to consider rescinding a rule, better known as the fiduciary rules, set to go into effect in April 2017 that orders retirement advisers, overseeing about $3 trillion in assets, to act in the best interest of their clients.

The fiduciary rule, rolled out by the Obama administration, took many years to develop. The fiduciary rule aimed to protect retirement savers from bad advice and keep more money in their pockets. It also sought to indirectly change the way the industry structures its products and advisor compensation policies.

Trump, The Fiduciary Rule And Your IRAUnder the fiduciary rules, broker-dealers would be required to act in their clients’ best interest rather than encouraging money moves that directly benefit the broker’s bottom line.  Among the requirements in the rule, brokers have to justify the varying compensation they can receive for recommending one investment product over another to a retirement saver. Brokers said that rule makes sales fees on some mutual funds, known as sales loads, and some funds’ differing share-class prices problematic for accounts that charge investors for each transaction made.

Currently, if you work with a financial advisor who is a registered broker, he or she only has to recommend investments that are “roughly suitable” for you. That means if your advisor has the option between two similar mutual funds, but one pays out a higher commission, he or she can put you in that one—even if the other fund has lower fees and would boost your portfolio in the long run. In rescinding the fiduciary rules, the Trump administration wants to keep this system in place, arguing that the fiduciary rule will limit investment choices and burden the industry with unnecessary regulations.  According to The industry’s top lobby group, the Securities Industry and Financial Markets Association estimated the fiduciary rule would cost firms $5 billion to implement and another $1.1 billion annually to maintain.

The Obama Administration believed that fiduciary rules would help lower costs for American retirement account investors as well as better protect the average retirement investor from bad advice and unnecessary fees.  On the flip side, the financial industry has attacked the rules as being overly burdensome as well as potentially limiting the type of investments and advice financial advisors can offer.  To this end, in 2016, Edward Jones and some other financial advisors announced that it would stop offering mutual funds and exchange traded funds in IRA accounts that charge investors a commission and move to an account value fee based arrangement.

In the end, President Trump seemingly sided with the financial and securities industry that the fiduciary rules were overly burdensome and would limit investment options for IRA holders.  In the end, it appears that President Trump was not convinced that any lower consumer costs associated with the enactment of the fiduciary rule would be enough to overcomes its perceived shortfalls. Because the fiduciary rules have not yet been enacted into law, President Trump’s executive order rescinding the rule will have no current impact on IRA investors, however, the long-term impact could be significant for both investors and financial advisors.

For more information about the fiduciary rule, please contact us @ 800.472.0646.

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Feb 07

Workplace Retirement Plan May Limit IRA Deductions

This article originally appeared on Forbes.com



In general, one may be able to claim a deduction on their individual federal income tax return for the amount contributed to a pre-tax Individual retirement account (“IRA”), also known as a Traditional IRA.  Whereas, after tax or Roth IRA contributions are not tax deductible.  For 2017, the maximum IRA contribution is $5500 and $6500 if over the age of fifty. However, in the case of an individual that is covered by an employer qualified retirement plan, such as 401(k) plan, the IRA contribution amount that individual can deduct could be limited by his or her modified adjusted gross income (“AGI”).  An individual’s AGI is essentially the amount of gross income earned during the year, less certain adjustments. One can find the allowable reductions to your income on the front page of IRS Form 1040.

The two key factors in determining the amount an individual can deduct from their pre-tax Traditional IRA contribution in a given year are (i) whether the individual is covered by an employer 401(k) plan and (ii) their AGI. For individuals that are not covered by an employer 401(k) plan, they are free to deduct the full amount of their IRA contribution up to $5500 or $6500, if over the age of fifty, for 2017.  For example, if Bill Gates was no longer employed by Microsoft or any other company and was not covered by a retirement plan at work, he would be able to deduct the full amount of his IRA contribution for 2017, notwithstanding his annual gross income amount.  Whereas, if Bill Gates was still employed at Microsoft and was covered by the company’s retirement plan, he would not be able to take a deduction for his IRA contribution because his income would exceed the maximum threshold amount.   Interestingly, the Internal Revenue Service (“IRS”) rules do not distinguish whether the individual that is covered by an employer retirement plan actually participated and made contributions to the plan.  The rule states, however, that so long as the employee is covered by the employer retirement plan, that individual’s AGI will determine whether he or she can take a tax deduction for the IRA contribution.  Thus, if an individual is covered by an employer sponsored retirement plan, notwithstanding whether that individual actually made a contribution to the plan, the individual’s AGI will be the determining factor whether he or she can deduct his or her IRA contribution.  An individual that does not have access to an employer 401(k) plan has no such limitation.

For 2017, if an individual is covered by a retirement plan at work, the following table provided by the IRS will help one determine what amount of his or her IRA contribution for 2017 is tax deductible.

Filing Status Your Modified AGI IRA Deduction Amount
single or
head of household
$62,000 or less
______________more than $62,000 but less than $72,000________________
$72,000 or more
A full deduction up to the amount of your 2017 contribution limit
_______________Partial deduction
No deduction
married filing jointly or qualifying widow(er) $99,000 or less
________________more than $99,000 but less than $119,000________________
$119,000 or more
A full deduction up to the amount of your 2017 contribution limit
Partial deduction
No deduction
married filing separately Less than $10,000
$10,000 or more
Partial deduction
_______________No deduction

Having the ability to contribute and deduct IRA contributions is an important aspect of many Americans’ retirement strategy.  In order to best take advantage of the existing IRA contribution and deduction rules available, it is vital that Americans with access to an employer retirement plan have a solid understanding of how the IRA contribution deduction rules work.

For more information about IRA Contribution Rules, please contact us @ 800.472.0646.

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Jan 20

Understanding Your Options When Inheriting An IRA From A Non-Spouse

This article, written by our own Adam Bergman, appeared on Forbes.com

Unfortunately, the Internal Revenue Service (“IRS”) does not allow you to keep retirement funds in your account indefinitely. The required minimum distribution rules (“RMD”) were created in order to guarantee the flow of IRA funds into the federal income tax system as well as to encourage IRA owners to use their retirement funds during their retirement.

One generally has to start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when reaching the age 70½ or as the beneficiary recipient of an inherited IRA. Of interest, Roth IRAs do not require withdrawals until after the death of the owner.

There are a number of distribution options available to a designated IRA beneficiary, generally dependent on whether the deceased IRA owner’s sole primary beneficiary is a spouse, and whether the deceased IRA owner has reach 70 1/2, the age for RMDs. Remember, a living IRA owner is not required to take an RMD until the IRA owner reaches the age of 70 1/2.

If an IRA holders dies and designates a non-spouse, such as a parent, child, sibling, friend, etc. as the primary beneficiary of his or her IRA, the non-spouse beneficiary will typically only have two options for taking RMDs with respect to the inherited IRA: (i) the life expectancy rule and (ii) the five-year rule.

Understanding Your Options When Inheriting An IRA From A Non-SpouseThe IRS allows a non-spouse beneficiary to use the life expectancy rules to calculate the IRA required distributions after the deceased IRA holder’s death. The IRA distributions must begin to be taken no later than December 31 of the year after the death of the deceased IRA holder’s death. There are no additional opportunities for delaying IRA distributions for non-spouse beneficiaries. If distributions are made under the life expectancy rule to a designated beneficiary non-spouse, the applicable distribution period for the calendar year immediately after the year of the IRA owner’s death is the beneficiary’s remaining life expectancy as of his or her birthday during that year and the applicable period is reduced by one for each subsequent distribution calendar year. Unlike in the case of a spouse beneficiary, which is required to use the life expectancy of the deceased IRA owner for purposes of calculating the annual RMD amount, a non-spouse beneficiary is required to use his or her life expectancy when calculating the annual required distribution amounts. For example, if Jane is designated as sole beneficiary of an IRA of her mother, who died during 2015, her first distribution calendar year is 2016. If Jane turned 60 years old during that year, the applicable distribution period would be based on the life expectancy of a 60-year-old. Conversely, the non-spouse beneficiary has the option to select a five-year distribution rule, which would required the non-spouse beneficiary to take the entire amount of the inherited IRA as a distribution over a five year period. Of note, a non-spouse IRA beneficiary does not have the option to convert the traditional inherited IRA to a Roth IRA.

The IRA custodian (the financial institution) is required to submit reports to the IRS and to the IRA owner regarding RMDs. If an RMD is required to be taken from an IRA for a calendar year and the IRA owner is alive at the beginning of the year, the IRA custodian that held the IRA as of December 31 of the prior year must provide a statement to the IRA owner to report the due date of the RMD and, in most cases, the amount that is due. The IRA custodian is required to send this report to the IRA owner by January 31 of the year for which the RMD is required.

The RMD rules and options for a non-spouse beneficiary can bring to bear some financial and tax implications.  Therefore, it is important that one consults a tax professional or financial advisor for further guidance.

For more information about options when inheriting an IRA, please contact an IRA Expert @ 800.472.0646.

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