This blog post summarizes recent federal bills that have been introduced (but not yet passed), proposals by the Biden Administration, and guidance issued by the Internal Revenue Service with respect to the taxation of digital assets.
Summary of the Guidance:
The Responsible Financial Innovation Act (the “RFIA”) introduced
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). This blog post summarizes the tax provisions of the CARES Act, and has been updated to reflect subsequent guidance from the Internal Revenue Service (“IRS”) on these provisions, and the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010).
Today, March 23, 2020, for the second time the Senate defeated a procedural motion on a third stimulus bill, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (H.R. 748). The vote was 49 in favor and 46 opposed (yesterday, the vote was 47 to 47). Sixty votes were
The first official guidance on the taxation of cryptocurrency transactions in more than five years has been issued.
The guidance includes both a Revenue Ruling (Rev. Rul. 2019-24, 2019-44 I.R.B. 1) and answers to Frequently Asked Questions on Virtual Currency Transactions (the “FAQs,” together with Revenue Ruling 2019-24, the “Guidance”) was issued on October 9, 2019 by the U.S. Internal Revenue Service (the “IRS”). The Guidance provides much sought information concerning the tax consequences of cryptocurrency “hard forks” as well as acceptable methods of determining tax basis for cryptocurrency transactions. The Guidance also reasserts the IRS’s position, announced in Notice 2014-21, 2014-16 I.R.B. 938, that cryptocurrency is “property” for U.S. federal income tax purposes and provides information on how the rules generally applicable to transactions in property apply in the cryptocurrency context. However, important questions remain unanswered. It remains to be seen whether more definitive regulatory or administrative guidance is forthcoming.
The Guidance comes amidst an ongoing campaign by the IRS to increase taxpayer compliance with tax and information reporting obligations in connection with cryptocurrency transactions. In 2017, a U.S. district court ordered a prominent cryptocurrency exchange platform to turn over information pertaining to thousands of account holders and millions of transactions to the IRS as part of its investigation into suspected widespread underreporting of income related to cryptocurrency transactions. Earlier this year, the IRS sent more than 10,000 “educational letters” to taxpayers identified as having virtual currency accounts, alerting them to their tax and information reporting obligations and, in certain cases, instructing them to respond with appropriate information or face possible examination. Schedule 1 of the draft Form 1040 for 2019, released by the IRS shortly after publishing the Guidance, would require taxpayers to indicate whether they received, sold, sent, exchanged, or otherwise acquired virtual currency at any time during 2019.[1]
Taxpayers who own or transact in cryptocurrency or other virtual currency should consider carefully any tax and information reporting obligations they might have. Please contact the authors of this post or your usual Proskauer tax contact to discuss any aspect of the Guidance. Read the following post for background and a detailed discussion of the Guidance.
Introduction
On October 31, 2018, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) proposed new regulations (the “Proposed Regulations”)[1] that are likely to allow many controlled foreign corporations (“CFCs”)[2] of U.S. multi-national borrowers to guarantee the debt of their parents and to allow the U.S. parent to pledge more than 66 2/3% of the voting stock of the CFC (and to have the CFC provide negative covenants), all without causing the U.S parent to recognize deemed dividend income under Section 956 of the Code.[3] Specifically, the Proposed Regulations will exempt a corporate “United States shareholder”[4] of a CFC from including its pro rata share of a CFC’s earnings attributable to an “investment in United States property” (a “Section 956 deemed dividend”) as income to the extent that such deemed dividend would be excluded from income if it was paid as an actual dividend under Section 245A. However, there will remain certain situations where Section 956 will still trigger deemed dividends.[5] Although the Proposed Regulations are proposed only (and may be amended before being finalized), corporate U.S. borrowers may rely on them so long as the borrower and all parties related to the borrower apply them consistently with respect to all CFCs of which they are United States shareholders.[6]
This post outlines at a high-level certain provisions under the recently enacted 2017 tax legislation (Pub. L. 115-97, the “Tax Act”) that may affect M&A Transactions. Some of these rules are very complex, particularly in cross-border transactions, and this post describes them in general terms without all of their fine details. The discussion of foreign corporations below is in the context of foreign subsidiaries of U.S. groups.
Multiple Lower Effective Corporate Tax Rates
There are now multiple effective corporate tax rates and the much-despised corporate alternative minimum tax has been repealed. Because all of them are substantially below 35 percent, they may contribute to an increase in asset prices. In addition, tax benefits now may be less valuable to corporate purchasers than to non-corporate buyers.
Base Corporate Income Tax Rate—21 percent tax rate (effective for taxable years beginning after December 31, 2017). No sunset provision.
Certain Foreign Source Income Earned from the U.S (“FDII”).—Intended to attract cross-border business back to the U.S., a tax rate lower than 21 percent is now imposed on certain excess returns earned by a U.S. corporation on the sale, license or lease of property or the provision of services to an unrelated foreign party for foreign use or consumption. (Additional rules apply when the transaction is with a related party.) In broad terms, the lower rate applies to the foreign source income from these transactions in excess of 10 percent of the corporation’s allocable depreciable tangible property basis.
On Friday, December 15, the U.S. House of Representative and Senate conferees reached agreement on the Tax Cuts and Jobs Act (H.R. 1) (the “Final Bill”), and released legislative text, an explanation, and the Joint Committee on Taxation estimated budget effects (commonly referred to as the “score”). Next week the House and Senate are each expected to pass the bill, and it is expected to be sent to the President for signature the following week. As the conferees actually signed the conference text, changes (even of a limited and/or technical nature) are extremely unlikely at this point.
The Final Bill largely follows the Senate bill, but with certain important differences. We outline some of the most significant differences between the Final Bill, the earlier House bill, and the Senate bill. We then discuss in detail some of the most significant provisions of the Final Bill. The provisions discussed are generally proposed to apply to tax years beginning after December 31, 2017, subject to certain exceptions (only some of which are noted below). While we discuss some of these provisions in detail, we do not address all restrictions, exclusions, and various other nuances applicable to any given provision.
In the early hours of Saturday morning, the U.S. Senate passed the Tax Cuts and Jobs Act (H.R. 1) (the “Senate bill”), just over two weeks after the U.S. House of Representatives passed its own version of the same legislation (the “House bill”). Members of the House and Senate will next convene in conference to attempt to reconcile the House and Senate versions of the legislation. Identical versions of the bill must be passed by simple majorities in both the House and the Senate before the bill, and signed by President Trump, before such legislation will become law.
The final Senate bill, although similar to the bill passed by the Senate Finance Committee on November 16, contains several important changes. We outline some of the most significant changes below, followed by a list of some of the major outstanding points of difference between the House and Senate bills as passed by the respective chambers. We then discuss in detail some of the most significant provisions of both bills.
In this first of (we hope) many posts on the interesting and myriad tax issues arising in the world of cryptocurrency and blockchain technology, we focus on the very basic U.S. federal income tax consequences of cryptocurrency transactions. The following is a very high-level discussion of the consequences generally applicable to U.S. individual holders of cryptocurrencies, and will not be applicable to all taxpayers depending on their particular situation.
While it might seem an academic question, the distinction between property and currency is the key to the U.S. federal income taxation of cryptocurrencies. Gain on nonfunctional foreign currency exchanges (i.e., currencies other than the main currency used by a trade or business) is generally ordinary income, and therefore taxable under current law at marginal rates up to 39.6% (or 43.4%, factoring in the net investment income tax). In contrast, gain or loss on the sale of property can constitute either ordinary or capital income, depending on whether the property sold is or is not a capital asset. If a capital asset, the reduced long-term capital gains rate (up to 23.8% under current law, including the net investment income tax) could apply if the asset sold was held for more than one year.
Yesterday afternoon, the House of Representatives passed the Tax Cuts and Jobs Act (H.R. 1) (the “House bill”). The House bill is identical to the draft bill approved by the House Ways and Means Committee on November 10. Late last night the Senate Finance Committee approved its own conceptual version of the Tax Cuts and Jobs Act. An initial, descriptive version of the Senate Finance Committee bill (for which actual statutory text is still forthcoming) prepared by the Joint Committee on Taxation (the “JCT”) was released on Thursday, November 9. The Senate Finance Committee subsequently revised the bill significantly, as reflected in the JCT descriptions of the modifications released on Tuesday, November 12, and a further amendment[1] released late last night (as modified, the “modified Senate bill” and generally, the “Senate bill”). The modified Senate bill varies in certain important respects from the House’s bill.
The modified Senate bill introduces significant changes to the Senate bill released last week. Perhaps most significantly, the modified Senate bill would repeal the provision of the Affordable Care Act (ACA) requiring individuals without minimum health coverage to make “shared responsibility payments” (commonly referred to as the “individual mandate”). The modified Senate bill also provides for most changes to individual taxation to sunset after December 31, 2025, including the repeal of the individual AMT, the reduced rate for pass-through entities, the reductions in ordinary income tax rates and brackets, the repeal of itemized deductions, the increased standard deduction, and the expanded exemption for estate and generation-skipping transfer taxes. Notably, the reduced corporate rate cut of 20% (reduced from 35%) effective in 2019 would be permanent.
We have outlined below some of the significant changes in the latest draft of the Senate bill, and summarized the key differences between the modified Senate bill and the House bill. Because the Senate has not yet released legislative text, this summary is based only on the JCT’s descriptions of the Senate Finance Committee’s bill (in its original and modified form) and the November 16 amendment (as published on the Senate Finance Committee website).