Tax Tips: May/June 2022

Get ready for new cryptocurrency reporting requirements

If you own cryptocurrency, such as Bitcoin, or certain other digital assets, be aware that new tax reporting requirements go into effect next year. The new requirements don’t affect your tax liability — you’re already required to recognize gain or loss on certain transactions involving these assets in much the same way as securities or other capital assets. But starting with the 2023 tax year, digital asset platforms (known as “Crypto Exchanges”) will report these transactions to you and the IRS on Form 1099-B.

Review Forms 1099-B carefully and keep documentation of your digital asset transactions. Crypto Exchanges may not have access to the information needed to calculate your tax basis in these assets and, as a result, the forms may overstate your gains or understate your losses. Also, if you use cryptocurrency to pay for goods or services, note that the new rules will require businesses to report transactions of $10,000 or more to the IRS in the same way they currently report cash transactions above that threshold.

Buying real estate? Pay attention to purchase price allocations

Rental real estate owners may give little thought to the way the purchase price is allocated between land and building when purchasing or selling property. Some people simply use a rule of thumb, such as the “20/80 rule” (20% of the price is for land, 80% is for the building). But these allocations can have significant tax implications, so it pays to consider them more carefully. For example, the cost of a building can be depreciated, but the cost of the land can’t. So, to maximize your tax deductions, it’s in your interest to allocate as much of the price as possible to the building.

If you’re selling depreciable property, gain attributable to recaptured depreciation is taxable at rates as high as 25%, with the remaining gain taxable at lower capital gains rates. If you’re able to allocate most of your gain to the land (for example, because the land’s value has appreciated significantly, while the value of the building hasn’t), you can minimize the amount of gain taxed at the higher rate.

Watch out for employer-provided life insurance

Employers that provide employees with group term life insurance as a benefit may create unexpected — and unwelcome — tax consequences. To the extent the coverage exceeds $50,000, its cost is considered taxable income to the employee and is subject to payroll tax. To avoid these consequences, employers may want to consider limiting group coverage to $50,000 per employee and exploring other options for providing additional coverage, such as allowing employees to purchase supplemental group term life insurance.

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