When tax time comes around, are you being reactive or proactive? Do you find yourself swimming in a sea of questions? Like, is it better to do my tax return cheaply? How do I know if I’m doing them the right way? Welcome to The Tax Answers Advisor with Marcelino Dodge. Today we’ll answer these questions and many more, sharpen your pencils and take some notes. Now here is your host, Marcelino Dodge.
Marcelino: Welcome to The Tax Answers Advisor. I am Marcelino Dodge, Enrolled Agent. The tax quote for this week is, “Today it takes more brains and effort to make out the income tax form, than it does to make the income.” Nicely said there, Alfred E. Newman. And indeed yes, it takes a lot more brains to fill out the tax forms, which is why I am here. Because it is a vital, vital thing to have tax preparers and to have individuals like myself tax professionals and help you to do it.
Because, many people have the good sense to go and earn the income and to do all that they can but actually fill out the tax form. That’s why we need a tax advisor like me working for you on your behalf. I’m going to thank my listeners out of this show that are out in China, Canada and throughout the world, the United States. Great to have you listening in and getting this vital information today.
And don’t forget, you can always reach me at www.cashtracksfinancial.com, through email at firstname.lastname@example.org, and even call me at 844-394-4287. A few updates for the week is a big, big item in the news is the COVID relief package that has many actually wonderful tax provisions built into it. But as many already know, by the time this program came on, the President has yet to sign this package, because he has a number of problems with it.
And well right now just leave it up to people to make their own decisions regarding it. But that’s where we are now. If the President does go in and sign this or it does become law, we’ll discuss more of these attacks provisions including the stimulus payments that are a part of the package at currently at 600 right now. So, we’re gonna kind of wait before we go on to explain the benefits of this chat way we whatever we give out to you is information that is in line with what the law is.
Also an update, keep in mind tax season is approaching. We don’t have an exact date when we can start electronic filing returns. So it’s good to keep that in mind. But there’s no reason why we can’t start thinking about preparation. Keep in mind that as a tax preparer, I’m very aware of everybody’s concerns regarding the virus and how you can do that and get some good advice during that time. So we are perfectly set up to take your E-signature or online payments. Also document upload electronic copies of tax returns are all provided if you’d rather not have a hard physical copy. Also, we can easily do your return no matter where you live in the United States or for that matter even around the world, a US citizen needing their tax return done. We can do a virtual online appointment through zoom, which is very, very nice. And we’ve had good success in doing this with our client touts. I’d still like to meet you face to face. But over the internet will be just as good with these online appointments.
And then of course get your signature electronically and have you upload ID documents and all of those wonderful information that we need to get it done. So yes, we can very easily help you out, as well as work out intelligent solutions for you to help reach specific goals you have because we know everybody looks there’s apps on your phone. There’s all kinds of computer programs that are supposed to help you but what really helps you to define your goals.
That’s what we’re here to do is help you to find your goals. Find your success indicators, what’s going to help you to be successful, gather all that information, whether it’s personally or for your business, we do both. We help you create an action plan. We help you implement the action plan, working with you year around. And as a part of that, of course making sure all your compliance needs are done that’s tax returns, individual tax returns for individuals.
And if you’re in the business, you’re doing payroll, our fees include covering all of that for you as well. Making sure your payroll is done, your compliance needs with payroll is all met so that you can have one fee have it all covered and have good access to us. As a team, me and my assistant on a year-round basis to help you to cover what you need to cover. Again, to look more into this, we can set up an exploration appointment, simply by calling us 844-394-4287.
You can also email at email@example.com, as many may be tuning in today, because of this special topic, we’re discussing, the new economy, also known as the gig economy, virtual currencies, all of these are areas that we need to look at, because the IRS is playing catch up with these and we got to keep in mind that with this is that there is many tax consequences and tax ramifications that are with this business and tax planning that we can indeed help you with throughout this economy this age that we’re in.
Because we consider there’s been a change in business, especially since the great recession in from 2008, 2009, and that arena, there has been a great change. There’s been a lot of one switching from being employees to be in freelancers, we see how the internet and global economy has really been getting this cranked up and going, where many people are connected via the internet across local, state, national, international lines. That means like I’m reaching out to, to once listening to this podcast, to help you out, reconnect reaching across these lines to do this.
Also, we see that because of the internet, workers are available without having to commit to some type of contract or employment contract. They can freelance, they really like this. And we see a lot of those in the millennials and even some Gen Xers there. They like the freedom, freedom to set your own rates, which you feel your worth, which, like in all the type of work that you do. You can work on your own time, work at your leisure, get it done.
And of course, one of my favorite things work at your own pace. And so we think about this, once again, it all comes in there were many different types of businesses are popping up and connect people are connected through the internet. So thus, we got to not just think about how I’m going to make money, but yet, how am I going to take care of the tax that goes along with that? Because yes, all of this is subject to some type of income tax within us income tax law.
We also saw a lot with a lot of bank instability. We’ve been seeing currency devaluations. Guess what, what do we have now? We have virtual currencies like, Bitcoin out there, and many others that are becoming another way for people to save and invest. So that’s why we’re going to talk about those. And there is tax consequences with those as well. If you’re mining and trading those and buying stuff with those, it’s there’s taxes out there involved with those.
So we got to keep that in mind. Also, as part of this whole gig economy that we’re looking at, it’s the sale of an even rental of personal property, it can be transportation equipment, as well as even renting out homes, or just maybe a room or two in your home as what has resulted from this. So some of these areas, again, are areas where IRS and Congress have been slow to respond to these areas, yet they are coming around.
And ones need to be aware that yes, there is reportable income on this just because you’re making it online or even getting paid cash for certain services, or even getting paid in virtual currency for certain services. These items are still considered income and need to be reported properly, which is where we come in to help you to do so, help you to be able to track this. With some of this, we also got to keep in mind as you participate in the new economy, and are sharing in some of these areas virtual currency, or the rental or sale when it comes to personal property, transportation and so on or renting homes.
Is that, are you really in business? Or is it just a hobby? And so the importance of those questions, is it a business or is it a hobby? Those are absolutely vital and essential for the reason that it affects how income and expenses are reported on a tax return. Because particularly if you’re doing like transportation or rental like, an Uber or Lyft, for example, or if you’re just doing rental on a room or your home, even if just a small amount is made by rule and by law, that small amount is to be reported.
Now as we recognize as we look at this and we do earn some money in these activities, not everything will rise to the level of a trade or a business, which also affects if it gets to a level which right a business again, of course, how you pay tax, and the amount of tax that you pay. Because if it has at the level of just a hobby, it’s something that you do just occasionally, like maybe once a month or even say, you just do it at this, like, for example, this time of year because you want to earn some extra money to help give gifts.
Well, it may just be a hobby, but yet they still considered income. And with that being at the hobby level, it’s not subject to self-employment tax. And expenses, when you are a hobby are not deductible, except for what’s known as cost of goods sold, which is a whole another explanation. Yeah, what we want to keep in mind is that most expenses in a hobby are not going to be deductible.
And to keep in mind, what is a test as to whether I’m conducting business? Or am I working in a business-like manner? Well, it has to do with the time and effort expended, how much time am I expanding in this, once again, as I mentioned just a little bit ago, maybe you’re just doing it seasonally, for a couple weeks out of the year, earn a little extra money for gifts, or perhaps a vacation, or whatever you’re doing well, then if it’s just occasionally like that, then it could very well just be a hobby.
Whereas if you’re doing it on a more regular basis, like at least one day a week, I would think and you’re doing at least one day a week, 50 weeks out of the 52 weeks out of the year, or maybe if you’re actually out there doing it four to five days a week, then it may rise to the level of a business. Also what helps us to see whether it’s a hobbies are you making adjustments to increase profits? What is your knowledge and experience in said type of activity?
And then, of course, making a profit. Having a profit three out of five years is usually indicates that you are in business. Now as we’ve considered whether you’re a hobby, or a business, in particular, focus more on seeing if you’re a hobby, and maybe just have some income that needs to be reported. While we still need to do that safely. And we need to do it properly, which is where at cash tracks financial I come in, and help you to do so and prepare a tax return accurately based on the information provided as we help you to make sure you gather the correct information to be able to do all of that accurate reporting.
We’re going to take a step over here. Now, as we take a look first of all, at on demand ride sharing, this may be the most well-known and maybe even the most utilized of the in the internet economy of the sharing economy. This on demand. Now this is of course referring to services like Lyft, or Uber. I mean, I’ve used Lyft myself, and I’ve done some traveling, it has worked out very nicely for me. We see in many of these cases, the driver, which the drivers I’ve encountered, for the most part have been very friendly, very good people.
They’re in pretty much and it’s been I’ve been very appreciative of them because they know their area, they know their city, I mean, I’ve traveled to New York, Chicago, Orlando. And it’s actually a really joy to have individuals such as that, that know the roads know how to get you from one place to another very safely, at least for me, it’s worked out very well. And those drivers, I give a big shout out to the ones that I’ve done because they have, they’ve just been great and very friendly, very respectful.
And just the fact you’re using your own vehicle for this is quite a state that you’re willing to do this type of service. Now, when an individual uses their own vehicle. Of course, you use the app on your smartphone, to get the ride to find the driver and you make the selection there. Now the driver, once you get done, the company processes the payment from the rider. They subtract whatever their fee is, and they send that fee to the driver.
Well, in some cases, and I know like in the case when I worked with Lyft is the fact that some driver, is that you can if you think your drivers just tremendous and I’ve given tips to my driver, you can put a tip right there on the app, and then the company transfers it over to the driver. Now some individuals can also give cash tips, and they will do that to these drivers. Now if you’re a driver receiving this, you got to keep in mind that that cash tip it may be cash but it’s a tip.
It’s earned income. And so it’s still reportable. And we know that drivers report this income, or at least they shouldn’t be reporting the income of you are a driver for one of these companies, you can actually work with more than one company. I mean, I’ve used drivers that have both Lyft and Uber, little signs, whatever they have that showing that they’re driving for them. So that’s very important to keep that in mind that you can be contracted with more than one.
And drivers may get a 1099K, if they have over 200 transactions, or if they had over $20,000 in sales, which if you’re doing this on a full time basis, or doing fairly rarely, that’s possible. And in some cases, you may even receive a 1099 NEC, maybe in prior years, if you’ve been doing this, you’ve gotten a 1099 M, but this year, you may be getting a 1099 NEC. Of course, as we know, in some states have been going after Uber and Lyft for the fact of maybe they’re individuals that’s doing this driving his employees.
Well, at least from my standpoint, it’s better for the driver from a tax standpoint, for them to be an independent contractor allows them to take a lot more expenses under current tax law, and can actually give them some really good bet given for some really good things as compared to being an employee. But, we just got to keep those things in mind of what they can do. And I’m sure in this economy, and with the COVID going on right now some of those drivers have really their business or what they’ve done is really been affected. But yet, you still got to think about these things.
And we still got to consider what kind of expenses a driver can take and use. Of course, the biggest expense that a driver has when you’re driving for like Uber or Lyft is your automobile expenses. And we got to consider that there’s two ways you can do it. One is you can take either mileage, or you can use actual expense. And depending on circumstances, what will be better, I can’t tell you. But that’s where you have an all the information looking at it examining it, the best call can be made.
Now, when you do choose to go into this business, it is vital that if you want to be able to take mileage, the first year you do the service, whether it’s a new vehicle, or if you’re using an existing old vehicle, older vehicle that you have, or just a vehicle that you have before you start. You got to use mileage that first year you place it in service. Now we keep in mind that when you do use mileage that includes washes, insurance, repairs, tires, music, subscriptions, and a whole list of other items that are all included when you take mileage.
Now we’re going to take a little bit closer look at this and consider these expenses a little bit more. When we come back in a couple minutes here, this is Marcelino Dodge on The Tax Answers Advisor on The Voice America Business Channel.
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Today’s tax and financial environment is constantly changing. Tax laws change rapidly. The traditional reactive approach to tax preparation and taxes no longer works. To deliver the best possible outcomes in today’s world. You need a year-round approach to take advantage of tax law changes and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability. Plus, with this year-round approach clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at firstname.lastname@example.org or call 844-394-4287.
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This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today please call in the number is 1-866-472-5790. That’s 1-866-472-5790. You may also send an email to success2cashtracksfinancial.com. Now, back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor. This is Marcelino Dodge, Enrolled Agent. Appreciate you listening in today’s program as we’re covering about the sharing economy and virtual currency here, we just started before the break talking about how drivers for Lyft and Uber can use mileage as part of their deductions against the income that they’re earning. And a good record of total miles and personal miles is really needed on this.
Now what we want to make sure and discuss is that drivers have a dashboard that does a really good job of giving what is needed for income that they earned from the service or during their activity of doing their driving. But yet, they really need to, and this is what we really encourage you to do is to keep a separate log of total miles, because you can have overlapping miles and information from your dashboards, which isn’t necessarily going to be the most accurate.
But keeping a good total mile log separate is would really be the best idea to do this. Now, as we look at this too, with mileage and taking mileage, even if you take mileage, the business portion of it, which is interest, personal property taxes and tolls, all of those can still be taken, in addition to mileage when you’re doing a driver when you’re a driver, like for Uber or Lyft. And so it’s absolutely vital that you do keep a very, very accurate mileage log.
And I do know that many of these drivers do have tolls that they pay. Because I’ve seen in the vehicles I’ve written in, in particular in New York City, where they got those toll. Well, it’s like a prepaid toll thing, which a lot of toll roads have them. But anyway, I saw them in the cars that they use in their vehicles, and thus, they pay they have tolls if they pay. And of course those would be expenses they can take, even if they use mileage as an actual expense.
Now, they can use actual expenses, which is actually taking everything, including the fuel, the insurance, the repairs, the tires, they can do all of that. And you can do that. All of that all of those expenses, errors, a lot of bookkeeping that you got to do in doing so. But yeah, you can do that. And it can be, it can be a pretty good deduction, then of course, at appreciation on your vehicle comes in which the depreciation is actually calculated in when you do actual mileage as well. Now, that’s where the mileage log still is necessary, if you’re using actual expenses, as a Lyft, or Uber driver is that you got to have business mileage, because whatever that business mileage is, is what you get is the percentage you get to take of your actual expenses. So it’s very, very important to do so. But yet, even as a driver, there’s other reasonable expenses that you can take, and one of our recommendation is, of course, is that you have a cell phone that you use, what I would recommend is that if you’re doing this driving and you’re doing this type of driving on a fairly regular basis, I would recommend a separate cell phone to use for this strictly for business.
That way, you can take 100% of that cell phone, you don’t have to worry about keeping any type of cell phone log or anything, you just use that cell phone strictly for business purposes.
And I know some of them, some of the drivers use the GPS and the maps on there to help them to get to the destinations that the individuals have, of where they’re going. And certainly that’s a very, very good tool. So yeah, use that. Or if you get a, or if you get a regular GPS, that you’re using that as well we can be in the service fees on that would be deductible as well. Now also we get fees, you get charged fees by the transportation companies, those are deductible expenses also, for drivers.
And then some drivers will provide beverages and snacks to their customers, maps, and other information. Well, once again, this information, these type of conveniences and bonuses for people who ride with them would definitely be deductible expense for you in driving your Uber vehicle or Lyft vehicle. And as I mentioned earlier talking about are you in business or is it a hobby, again, considering. Are you in business, well, how many hours per week or month do you do this?
That can really justify whether you’re in business, or it’s just a hobby, exercise, just extra money, sporadically few times a year may just be a hobby and none of these expenses really apply. But if it is a hobby, you’re not subject to self-employment tax, usually don’t have any expenses. And we report it on page one, I used to be page one of the 1014, it’s still, you still reported on the 1040. As well as another, when you’re dealing with this kind of gets out of our area a little bit, but there’s other local rules and regulations that you have to make sure you abide by.
But yeah, we can help you in all these areas in many areas, helping you to plan and to make sure that you are taking advantage of all the tax areas that you can, we can very easily help you to do that. And even have suggestions on mileage apps that you can use to track your business miles as well. So that’s a little bit to help you if you’re doing Uber or Lyft driving. Now we keep in mind, also, as we look around the internet, there are sites that are designed to help you raise money, such as GoFundMe, and give me forward.
Now people make contributions or donations to these to help people out maybe for medical expenses, or some other maybe, and some people have made out ones to help them for business purposes. Now, when you make a donation to this, you got to keep in mind that unless it’s actually a qualified charity that you’re donating to through one of these types of websites, it’s not going to be a charity deduction.
If you give money to a person who perhaps need help with medical expenses are helps with their business. Well, you’re actually giving them a gift. And that gift is not deductible. If you’re giving it to some type of qualified charity, which is not, which is usually a 501C3 Organization, then you’re looking at deductibility on your tax return. And if you gave like 50 bucks, hey, you maybe you could probably take it on the front page of your tax return with the $300 deduction that’s being given this year.
So just keep that in mind if you’re putting money in those sites. Now, if you are an individual receiving this money, if you’re doing it just for like, just like help you cover medical expenses or other personal matters, well, it’s not considered income to you, you receive it as a gift. But if you are using one of these sites, and you’re getting money for some type of business purpose, could very well be business income.
So it’s good to keep that in mind, as you’re looking at these sites for raising money, whether you’re looking to give to one. Or if you’re looking to use one to help you to get some money, just a few thoughts to keep in mind as to what you need to be doing tax wise or not be doing tax wise. So to make sure you’re taking care of the right areas here. Now many people I haven’t used one of these, we did use one of these a couple years ago.
Vacation property, many people have like extra rooms in their homes that they’re using. And of course, most common way, most widely one that I know of anyway, is Airbnb. And there’s another one called home away, where people usually rent out a room, or a large room or maybe their home, they rent out for a short-term basis that they are using to earn some extra money. And they have had these posted on like Airbnb for a period of time where you can rent for one night or several nights or a week or whatever the case may be.
Once again, these works similar to how the uberian lift does, is that they connect the renter with the owner of the property that’s going to have that’s going to have the room. And so like Airbnb collects the funds, they take out their fee, and they forwards that on to the owner, or the one who is renting out the room. And in many cases, where one is getting doing this, they’re doing a rental, it’s usually seven days or less, it could be one night, two nights, maybe seven days or more. It just really depends.
But in most cases, it’s seven days or less where this is being done. And when once again, these individuals who are doing these type of rentals, they could get a 1099K possibly for the transactions that are being collected. Now being a short term rental, there’s a couple of different areas that fall into here. Say you do this, once again as a means to earn a little bit of extra money and you’re doing it just part time.
In fact, if you’re renting out a home for less than 15 days a year so say you only do for 14 days a year. A really nice area that is within the law that allows you to not report income, on the income you make for 14 days or less of renting or renting a home, no income reported, no expenses taken very nice provision. But once again, we stop and we look and see, well, if it’s more than 15 days, then the income needs to be reported.
Which, depending on circumstances could be in one or two different places, which is where once again, we come in as the professional as the one here, the one, your advisor, the one working with you to say, help you to understand this is where we need to go ahead and be reporting this information. Now, as you look at renting when you’re doing this type of renting, there’s many expenses that you can deduct, it has to be attributed to the rented room or to the property itself.
That’s where you can take the expenses there. So say, if you’re doing a room in your home, and you’re buying specific furnishings for that, so you say started with an empty room, and you say, I’m gonna use this room just for a rental. So you take out all of your personal property, but then you go and you buy, you buy a bed, you buy a dress, or you buy all this particular supplies and furnishings for your room that you’re going to use in this.
While all those furnishings essentially would be a deductible expense for you, because it’s all going to be related to the business, if you’re going to do this on a regular basis, then keep it on Airbnb and rented out for one day here, two days here, if you’re renting it out, like a hotel room, and basically those expenses. And depending on if you’re going to supply like toiletries, like you get in regular hotel room, sometimes you get those little bottles of shampoo or little soaps or whatever, if you’re going to supply those as well.
Those would also be a deductible type of expense. Now, sometimes it can be, it can vary depending on circumstances, sometimes you might be sharing a bathroom, but some of them have their own bathrooms attached. Those whatever expense associated with, if you’re supplying towels as well, that are specific for that rented room or property, those would also be a type of deductible expense on there for you.
And so when you have it regularly available, and using it like a hotel room, that changes the reporting as where it is, which many of these essentially are like a hotel room, you’re renting a room for a short period of time. And so you’re going day, or two or three, and you’re moving on. And in many cases, people are providing certain services, they’re going in, they’re providing, like they’re doing some cleaning during the day, just like a regular hotel main comes in, you’re providing those type of services, well, basically, it makes it like a hotel room, which, when you’re operating like under Airbnb, and you’re doing these types of services, what you’re doing, and your activity would be subject to self-employment tax.
And because you’re basically in business like hotel, the difference being is that it’s in your home, I would even go so far as to say that. Another expense you could have could be based on the size of the area you’re using exclusively for that business purpose, that room or maybe more than one room, you could have some depreciation you could take on your home. Other home related expenses, such as utilities, property taxes, property insurance, all of these percentage of those would probably be deductible against the income that’s coming in off of that room.
So then you could pay less self-employment tax as a result. So just some little areas to stop, to regularly consider to think about when you’re renting out your property there. And having a good person like myself, to help you to be able to figure those things out as you go along. We just really, really be helpful. And part of the planning process that we use, you’re doing this as we try to identify the help you to identify what your goals are in conducting these businesses, whether you’re doing an auto, auto rental.
I mean like the ride sharing services like Uber or Lyft, or you’re doing something like Airbnb. Our whole process comes in and helps you identify the goals or what you want to accomplish with those, helps to identify success factors, what’s going to be these indicators for you. What’s going to be perhaps threats to your success in doing so. And we can do all of this virtually through a nice web meeting to help you to be able to really put it all together to be able to run these smoothly.
And even with online accounting services that we can provide to be able to help you to do, and then of course, getting back to the whole goal of having income that you have off of these accurately reported, along with the information for the expenses, helping you to accumulate your expenses throughout the year, so that you can be able to have a good accurate tax return. And then of course, since you’re in business, and I’m really looking at this from those who are conducting as a business, is that then we can help you too, if you need to, help you to plan for making any estimated payments that may be due.
And then as you do these estimated payments, make sure those are properly calculated for the estimated amount of tax that will be due including of course, income tax, and any self-employment tax that you may have may have as a result of conducting these businesses. That covers those areas very nicely for you. What we do appreciate is your being here on The Tax Answers Advisor. When we come back in just a little bit, we’re going to touch somewhat on virtual currency and how that has risen.
And what happens with taxes on those and the importance of dealing with the taxes in regards to the virtual currencies that are out there. So what we’re gonna do, is we’re going to go ahead and take a little break right now, and then we’ll come back and discuss that. This is Marcelino Dodge on The Tax Answers Advisor on The Voice America Business Channel.
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Today’s tax and financial environment is constantly changing. Tax laws change rapidly. The traditional reactive approach to tax preparation and taxes no longer works. To deliver the best possible outcomes in today’s world.
You need a year-round approach to take advantage of tax law changes and to pay as little tax as possible. Marcelino Dodge of Cash Tracks Financial helps his clients to implement proactive tax strategies throughout the year to limit his client’s tax liability. Plus, with this year-round approach, clients can increase their cash flow and be as prepared for the future as they can be. Email Marcelino at email@example.com or call 844-394-4287.
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This is The Tax Answers Advisor with host, Marcelino Dodge. To reach our program today please call in the number is 1-866-472-5790. That’s 1-864-472-5790. You may also send an email to firstname.lastname@example.org. Now, back to The Tax Answers Advisor.
Marcelino: Welcome back to The Tax Answers Advisor. I am Marcelino Dodge, appreciate you listening to the last portion of today’s program here today as we’re going to cover about virtual currency and how that has tax consequences if you’re dealing in virtual currency and what has happened, and why do we need to discuss this? Well, we see and we look around the world we look at the happenings today and the uncertainty with banks, the markets and so on. We consider that that has contributed to the rise of virtual currencies like Bitcoin and so on.
And why is this such a hot topic to be discussing with regards to tax returns? Because people we can hear arguments like well, it’s not a government tender we can hear arguments such as well, those transactions aren’t reported to the IRS. Well, we got to keep in mind the IRS has this on their radar, and they’re looking at it closely. The IRS is looking at it so closely is that the question regarding digital currency has moved to the Top of the 1040 for the year 2020.
And the question is at any time in 2020, did you receive, sell, send, exchange or otherwise acquire any virtual currency? So the IRS is getting on to this. And they’re wanting to start, of course, collecting their share of any taxes that could be due. Now, that particular question, though, is only really applies if you had many different transactions? Because if you only purchase some, like through Coinbase, if you only purchase some, but yet, you didn’t sell any, or you didn’t have any other any other transactions, then you can answer that question no.
Which is really nice and simple. Whereas the other side is, if you had several transactions and used it, use your digital currency, or virtual currency to buy something, or you sold some, well, then yeah, you got to answer yes, then you got to make sure you file properly on the tax return. We think about exactly some maybe listening What in the world is Marcelino talking about their digital currency? Well, it is a monetary asset.
It’s in digital form includes, and it can actually include government currency. There’s also a form of digital currency known as JPM coin, which is released by JP Morgan Chase. Now, one of the areas which I urge caution on dealing with virtual currency is the fact that very often this type of currency is an unregulated type of currency. So it’s just kind of floating out there right now. Maybe regulation is going to come sometime in the future with it, I don’t know.
But right now, it is unregulated, which at least if you’re looking at it from an investment standpoint, could be a high risk type of investment. There’s another type of currency which is crypto currency. And that’s uses cryptographic technology to ensure that the transactions dealing with this type of currency are secure. An example of this type of currency is the Facebook Libra currency. As I mentioned, a few times through this program today, Bitcoin is probably the most widely recognized and widely known type of currency.
So if we get some virtual currency, where do we keep the currency? Well, many of us have some type of wallet, perhaps in our pocket, where we keep the physical currency. While there is also now what is known as a virtual wallet, which can be on your smartphone or another type of electronic device. And these virtual wallets include various types of mobile payment methods which have become extremely popular over the last several months because of the pandemic and this includes, I mean it could be like your Apple Pay, Samsung Pay, any of those type of pay services these mobile pay options that you have out there, and some.
One of the most popular ones of course, is a Starbucks pay that many people use. Now these virtual wallets once again we keep in mind are not tied to any particular Government Agencies. So just keep that as you look at it these virtual wallets you’re looking at virtual currency. Now, here’s the biggie here when it comes to virtual currency how the IRS defines and looks at virtual currency does not look at it at currents at virtual currency.
It does like a $1 bill or a $20 bill or $100 bill, it does not look at it that way, but it looks at virtual currency, as is property. So you’re buying property, which is basically the IRS looks at virtual currency as like you’re buying a piece of land, or like you’re buying a house. That’s how the IRS looks at virtual currency. And part of the reason this is done is because when you buy virtual currency there’s some type of value, some type of exchange value that it has you go in and you pay a certain dollar amount, and then you get a certain amount of virtual currency.
That is why, and that when you do that, that becomes us what’s known in our, in this business especially tax business is the basis you have in that currency. So say you go and buy some virtual currency for one birch, like Bitcoin. I’ll just use this as a general example bitcoins much higher. Say, say you’re going to buy a Bitcoin for $100. That is going to be your basis in that Bitcoin that you have.
Now, just happened to be the exchange value that you bought it at. Now say you go with a few months down the road, you take that $100. That one Bitcoin that you have. And you go and buy something with that Bitcoin well, but yet that Bitcoin has gone from being worth maybe $100 has gone maybe go up to being worth $120 in the exchange value. So you sell that Bitcoin to make your purchase, you have the Bitcoin gone.
Now, and you sold it instead of bought it at 100 but then you made your transaction you actually sold it at say 120. So from the IRS standpoint, you made $20 on that Bitcoin. And that $20 that you made is what’s going to be taxable. And that’s how the IRS looks at it. Now, how that $20 is going to be taxed really depends on how long you had it, because there is a holding period associated with such purchases there’s either short, which basically means you held it for less than 12 months or there’s long, which is basically holding it more than 12 months.
So if you’re continually buying bitcoins, or even if you’re doing mining for Bitcoins. Those prices that you get them at is going to be basis so there could be some actual identification, that has to be done when you sell or exchange those Bitcoins. Now also, some people will spend money, getting some very powerful computer machines, high computing capacity, or they will do mining for bitcoins.
Well that mining, when you get a Bitcoin for whatever for cleaning some algorithms or whatever make maybe could be is taxable income. And in some cases, good could just be hobby income depending on once again how regular, you are in doing it and what you regularly do with the mining of the virtual currency. It could just be hobby income. However, if you’re doing this, data mining, or this mining of virtual currency trying to build up a number of coins, Bitcoins for example, you’re doing it on a regular basis you’re trying to conduct it for profit once again.
This can rise to the level of a trade or business. And that’s once again can end up being subject to self-employment tax. So this is another area where you got to be very careful of if you’re doing this and why having proper tax planning and tax person helping you through these waters, these waters that can be very murky, for you have one help you to do these. Now, I haven’t actually encountered this part yet but I have heard about it, where one sometimes will pay an independent contractor in Bitcoins.
I haven’t personally had a client do it but some areas that has been done or this actually wouldn’t have happened, or what have come up probably but you pay an independent contractor $600 or more, you’re supposed to issue them a 1099. Now, if you happen to pay them in in virtual currency, like a Bitcoin, but that has an equivalent value of the $600 or more, then you still have a requirement to issue that contractor a 1099 for those services.
And I tell you what, I would absolutely recommend that you issue that 1099 so that you can take that deduction on your tax return. Because it’s another one of those areas that in the event of an audit. If you made that payment out as going through your books and the IRS looks at various expenses, and they see you did not issue out 1099s, the penalties for that can be massive and it’s best just to take care of it and do it.
Now I haven’t actually encountered this part of perhaps an employee, being paid in virtual currency, but obviously, it’s something that can be done. Now regular employee that’s being paid in virtual currency. And again, the one who is the employer, still has the requirement to do wage and payroll tax reporting, and still file the quarterly reports. So once again, to keep yourself in the good with the IRS.
And if you’re using a virtual currency as an employer, or as one paying independent contractors, you got to keep some good bookkeeping, you got to make sure you’re filing the proper forms. If you’re doing employees, do the wage, and payroll tax reporting just as if you’re giving them a check. That’s the best way to do it to protect yourself in doing so. Now, just so all are aware, we need to keep in mind that the IRS looks at this and they’re very interested in because the IRS is feeling that when ones are using virtual currency.
They’re doing so for tax evasion purposes. And there’s even some reasoning. That ones are using virtual currency for the purposes of money laundering, particularly the IRS looking at this, the IRS has started actually pursuing cases of virtual currency when they feel like it has not been accurately reported on tax returns, in fact, the IRS has virtual currency letters now, that they will issue out or mail out to people who they feel are not accurately reporting income from virtual currency.
Keep in mind now that digital wallets, such as Coinbase, are starting to also report transactions to the IRS so be thinking about that, and perhaps the most important part is when it comes to your virtual currency is that income reporting for virtual currency is absolutely essential because there is no statute of limitations on income. That is not reported on a timely filed return. So basically, you’re getting income of virtual currency, and you have a lot of transactions, call us.
We can help you to make sure those are all properly reported on your timely filed tax return. Yes, our services, we can definitely help you through all of our strategic planning processes or intelligent processes to help to get your goals, help to identify threats that you have, and help you to be even more successful financially as well as of course, keep you compliant with IRS rules. I will invite you back next week to The Tax Answers Advisor as we’re going to discuss the importance, the absolute importance of wisely choosing your tax preparer.
There’s a lot out there, some of them just are not very good, so we’re going to give you some good information on why you need to be wise and doing so. Especially as we go into 2021, is going to be vital to have and a tax preparer that is going to be around in the long run for you. Again, I thank you so much for listening today to The Tax Answers Advisor. I am Marcelino Dodge on the Voice America Business Channel.
Thank you for listening to The Tax Answers Advisor with host, Marcelino Dodge. We’ll be back again next Wednesday at 6pm Eastern Time and 3pm pacific time on The Voice America Business Channel. We’ll have more to share next week.