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Bitcoin and other cryptocurrency is a property for the purposes of federal tax. This can be painful because just about any property transfer can trigger taxes. Even crypto for crypto exchange can not be considered a 1031 free exchange of tax, according to the tax code.
For tax purposes, transfers are treated as sales unless you can find another way to transfer free cryptocurrency currency. The fact that the Internal Revenue Service (IRS) marks crypto as a property may lead you to consider the concept of property.
If you hold a crypto for someone else, is it really yours or not? In other words, if you hold the crypto for someone else, who has to pay the taxes? The answer may not be 100 percent clear.
Let’s start with the proposal that the federal income tax liability is generally assigned according to the property under local law. The problems can be intensely factual. Who should pay can turn on who has control and the benefits and burdens of the property. The same thing can happen with bank accounts.
There may be only one nominal owner, but the money could actually be held in trust for someone else. Who must pay the tax on the interest, can be debatable. To make things more confusing, local ownership and beneficial ownership are not always the same. The IRS may try to tax the beneficial owner of an account, regardless of that person’s rights to the funds under the local law in effect. The federal income tax is presumed to be awarded on the basis of the law of the foreign jurisdiction in force.
But the IRS and the courts often look beyond local law to impose taxes on the party who is the beneficial owner. In one case, a man was subject to income tax as the beneficial owner of a bank account, even if he was not the owner of the account under the local legislation. Conversely, if you simply hold something as an agent, you should not be taxed.
If someone “holds a legal title of ownership as an agent, then the principal and not the [agent] is the owner,” a tax case put him . A nominal owner is not the owner for federal income tax purposes.
In general, income should be taxed in the principal even if the agent is a joint signatory. The Supreme Court stated that “the law assigns the tax consequences of property held by an authentic agent in the main proceedings”. The Court has declared a refuge in three parts. Under this one, you will not be treated as the owner for tax purposes if:
- A written agency agreement is entered into with the agent at the same time as the acquisition of the asset
- The agent acts exclusively as an agent with regard to the good at all times;
- The agent is considered a mere agent in all transactions with third parties regarding the asset.
What to do if you do not meet these three conditions? Fortunately, the Tax Court has stated that these factors are not exclusive. Even an oral agency agreement might suffice, but if you are in a tax battle, you surely want to have it in writing.
Assuming a real agency, the agent should not face income taxes. no control and no beneficial right. The Tax Court defines beneficial ownership as the “freedom to dispose of funds from accounts at will”. Courts may weigh factors including: (1) which party benefits from the economic benefits of the property; (2) which party has possession and control; and (3) the intention of the parties
The taxpayer opened four bank accounts on behalf of his four children. He deposited money in the accounts, but later withdrew to facilitate his own business ventures. He continued to claim that his children owned all four accounts, so he reported none of the income they generated.
The IRS said the taxes were due, but the father argued that the accounts were solely for the benefit of his children. He claimed that withdrawals were mere loans and would be repaid. It is not surprising that the Tax Court determined that the father was the beneficial owner, so he had to pay the taxes. The court held that:
“Our conclusion is based on the identity of the true owner of the income producing property.In such an investigation, we do not consider a mere legal title, but a property It is the command over the ownership or enjoyment of its economic benefits that marks the true owner.When transactions are between family members, a special examination of the arrangement is required, from fear that what really is an economic unit is multiplied by two or more. “
” Although we do not doubt sincerity, we nevertheless found that [the taxpayer] had the accounts in question during The fact that [the taxpayer] may have considered the funds as the eventual property of his children does not change the nature of the domination and control he exercised over the years. r these funds in the years in question. [The taxpayer’s] access and use of money in children’s bank accounts to facilitate his own business establish him as the constructive owner of such funds. As such, we consider that it is subject to the tax on any income earned on children’s accounts …. “
The opinions and interpretations in this article are those of the author and do not necessarily represent the views of Cointelegraph.