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IRS Issues New Guidance on Taxation of Cryptocurrencies

MSR Update

The Internal Revenue Service just issued more guidance on the taxation of cryptocurrencies. The guidance comes in the form of Revenue Ruling 2019-24 and a set of FAQs. Officially, the guidance applies only to Federal income taxes. However, states are likely to follow the IRS rules.

Revenue Ruling 2019-24 is about hard forks in a distributed ledger. The IRS concludes that the hard fork is not itself a taxable event – that is, if you hold a cryptocurrency immediately before a hard fork and still hold it immediately after, the hard fork has no tax consequences. On the other hand, if you receive an air drop of the new cryptocurrency following the hard fork, you’re taxed on the value of the air drop.

Otherwise, there are no surprises in the new guidance. Thus:

  • Cryptocurrency is treated for Federal income tax purposes just like any other property, a diamond or a rusty 1964 Chevrolet. Cryptocurrency is not treated like U.S. dollars in any sense.
  • If you receive cryptocurrency in exchange for something else, whether property or services, you’re treated as having received a payment equal to the value of the cryptocurrency at the time you received it. If the bitcoin was worth $3,000 at the time you received it, you received a payment of $3,000 for each bitcoin you received, even if the bitcoin was worth $500 the month before or $10,000 the month afterward.
  • When you dispose of cryptocurrency, you have gain or loss based on the difference between the amount you paid for the cryptocurrency – your tax “basis” – and the amount you received for it, just as if you were selling the 1964 Chevy.
  • In general, you have capital gain or loss from selling cryptocurrency. But if you’re in the business of trading cryptocurrency the cryptocurrency will be treated as “inventory” and you’ll have ordinary income or loss.
  • Cryptocurrency received for services is treated as income for purposes of self-employment taxes as well as for purposes of income taxes.
  • Most people would guess that receiving cryptocurrency is taxable, g., my employer paid me $5,000 of ether, so I’m taxed on $5,000 of income. Less obvious is that you’re subject to tax when you pay someone with cryptocurrency. For example, if you’re the employer and pay your employee $5,000 of ether, you have engaged in a taxable sale of your ether, as if you had sold the ether for $5,000 and then turned around given $5,000 of cash to your employee.
  • If you trade one cryptocurrency for another, it’s a taxable sale. There is no such thing as a tax-free exchange of cryptocurrency, as there is for real estate.
  • If you own a bunch of bitcoin and want to use some to buy a house, you can choose which of your bitcoin to use (presumably the bitcoin with the highest tax basis).
  • If you receive cryptocurrency as a gift, it’s not taxable. Caution: there is no such thing as a business “gift.”
  • You can make a charitable contribution using cryptocurrency. If you’ve held the cryptocurrency for more than a year, your deduction is generally equal to the value of the cryptocurrency. Otherwise, your deduction is the lesser of the value of the cryptocurrency or your tax basis.
  • If you contribute cryptocurrency to an LLC or partnership, it’s not taxable at the time of the contribution. But when the LLC later disposes of the cryptocurrency, you will be taxed on any gain that was “built in” to the cryptocurrency at the time you contributed it.
  • If you own multiple crypto wallets, you can transfer among them without tax consequences.

Questions? Let me know.

REITS vs. Pass Through Entities: Section 199A and Real Estate Crowdfunding

Skyscraper Buildings Made From Dollar Banknotes

The 2017 tax act added §199A to the Internal Revenue Code and, with it, two complementary tax deductions:

  • A deduction of up to 20% of the income from a limited partnership, limited liability company, or other “pass through” entity.
  • A deduction equal to 20% of “qualified REIT dividends.”

Which is better for sponsors and investors?

As described here, the 20% deduction for pass-through entities is enormously complicated. Most important, the deduction can be limited for taxpayers whose personal taxable income exceeds $157,500 ($315,000 for a married couple filing jointly). These limits depend on the W-2 wages paid by the pass-through entity (not much for most real estate syndications) and the cost of the entity’s depreciable property (pretty substantial for most real estate syndications). And, naturally, those limits are themselves subject to special rules and definitions.

In contrast, the 20% deduction for qualified REIT dividends (which includes most dividends from REITs, other than capital gain dividends) is straightforward, with no cutdown for higher-income taxpayers.

Does that mean §199A favors REITs over LLCs and other pass-through entities? Not necessarily.

The key is that most real estate syndications don’t generate taxable income. Typically, the depreciation from the building “shelters” the net cash flow, at least during the early years of the project. The tax-favored nature of real estate is, in fact, part of what makes it such an attractive investment in the first place.

If an investor in an LLC is receiving cash flow from the syndication and paying zero tax, the 20% deduction of §199A is irrelevant. And, for that matter, so is the 20% deduction for REIT dividends. If a REIT isn’t generating taxable income because its cash flow is sheltered by depreciation, then its distribution will probably treated as a non-taxable return of capital rather than a taxable dividend.

As discussed here, the key advantage of a REIT over an LLC or other pass-through entity is that the LLC investor receives a complicated K-1 while a REIT investor receives a simple 1099. The relative simplicity of the 20% deduction for REIT dividends over the 20% deduction for pass-through entities is nice, but wouldn’t tip the balance in favor of a REIT by itself.

Questions? Let me know.

Married Couples As Accredited Investors

When a married couple invests in an offering under Rule 506(b), Rule 506(c), or Tier 2 of Regulation A, we have to decide whether the couple is “accredited” within the meaning of 17 CFR §501(a). How can we conclude that a married couple is accredited?

A human being can be an accredited investor in only four ways:

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  • Method #1: If her net worth exceeds $1,000,000 (without taking into account her principal residence); or
  • Method #2: If her net worth with her spouse exceeds $1,000,000 (without taking into account their principal residence); or
  • Method #3: Her income exceeded $200,000 in each of the two most recent years and she has a reasonable expectation that her income will exceed $200,000 in the current year;
  • Method #4: Her joint income with her spouse exceeded $300,000 in each of the two most recent years and she has a reasonable expectation that their joint income will exceed $300,000 in the current year.

A few examples:

EXAMPLE 1: Husband’s net worth is $1,050,001 without a principal residence. Wife’s has a negative net worth of $50,000 (credit cards!). Their joint annual income is $150,000. Husband is accredited under Method #1 or Method #2. Wife is accredited under Method #2.

EXAMPLE 2: Husband’s net worth is $1,050,001 without a principal residence. Wife’s has a negative net worth of $500,000 (student loans!). Their joint annual income is $150,000. Husband is accredited under Method #1. Wife is not accredited.

EXAMPLE 3: Husband’s net worth is $850,000 and his income is $25,000. Wife’s has a negative net worth of $500,000 and income of $250,000. Husband is not accredited. Wife is accredited under Method #3.

Now, suppose Husband and Wife want to invest jointly in an offering under Rule 506(c), where all investors must be accredited.

They are allowed to invest jointly in Example 1, because both Husband and Wife are accredited. They are not allowed to invest jointly in Example 2 because Wife is not accredited, and they are not allowed to invest jointly in Example 3 because Husband is not accredited.

The point is that Husband and Wife may invest jointly only where both Husband and Wife are accredited individually. At the beginning, I asked “How can we conclude that a married couple is accredited?” The answer: There is no such thing as a married couple being accredited. Only individuals are accredited.

CAUTION: Suppose you are an issuer conducting a Rule 506(c) offering, relying on verification letters from accountants or other third parties. If a married couple wants to invest jointly, you should not rely on a letter saying the couple is accredited. Instead, the letter should say that Husband and Wife are both accredited individually.

Questions? Let me know.

Simple Wholesaling Podcast: Raising Money Online for Your Deals & More

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Mark Roderick appeared on the Simple Wholesaling Podcast to talk about crowdfunding and the laws and logistics of raising money online.

In this episode, Mark discusses:

  • Mark’s story
  • Raising capital online
  • Businesses that have been very successful
  • How entrepreneurs and the consumers are protected online
  • Portals he recommends
  • Where people should start if they’re interested to try crowdfunding
  • The “don’ts” when trying to raise money on the Internet
  • What accredited investor means
  • The types of returns entrepreneurs pay out to their crowd investors
  • The effects on the stock market when we have many options to invest in different things

The Exchange with KB: Crowdfunding, Blockchain & Cryptocurrencies

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Mark Roderick appeared on The Exchange with KB podcast with host Kirill Bensonoff, where he discussed Crowdfunding, Blockchain & Cryptocurrencies. In this episode, Kirill and Mark discussed the JOBS Act, Title II Crowdfunding, Accredited Investors, Regulation Crowdfunding, why we need investment regulation, the future of cryptocurrency, Libra and other blockchain tech and cryptocurrency, and legislation regarding blockchain and crypto.

School for Startups Radio: Crowdfunding Update with Mark Roderick

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Mark Roderick appeared on School for Startups Radio with Jim Beach to discuss the current state of crowdfunding and how the industry is progressing. He discusses the booming real estate crowdfunding industry and how the rest of the crowdfunding space measures up.

The Real Estate Way to Wealth and Freedom Podcast

WEALTH AND FREEDOM PODCAST

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In this episode of The Real Estate Way to Wealth and Freedom, you will learn:

  • Crowdfunding – what it is and how it relates to real estate
  • Comparing and contrasting crowdfunding and syndication
  • How much money you can raise and who you can raise money from
  • Title 2, Title 3, & Title 4 crowdfunding – what to know
  • Predictions of how technology will impact real estate investing in the future

Questions? Let me know.

Real Estate Crowdfunding: How Far We’ve Come

 

The JOBS Act was signed by President Obama on May 5, 2012. Last month, a client of mine, Tapestry Senior Housing, raised about $13.6 million of common equity for a project in Moon Township outside Pittsburgh. Tapestry is an affiliate of Tapestry Companies, LLC, a national firm that operates as an owner, manager and developer of senior and multifamily properties. The Moon Township project involved the adaptive re-use of an existing Embassy Suites hotel.

This was the largest raise in the history of the CrowdStreet platform and, in my opinion, an important milestone for the Crowdfunding industry.

Not long ago, real estate Crowdfunding was limited to single-family fix-and-flips. At the annual meeting of NAIOP in Denver, in October 2014, I moderated a panel on Crowdfunding with Adam Hooper of RealCrowd and Darren Powderly of CrowdStreet, as it so happens. The audience for our panel was the smallest of the conference — but at the same time probably the youngest and most enthusiastic.

The size of the deals grew and high-quality sponsors like Tapestry began to notice. Now, when word gets out that someone has raised $13.6 million of equity, I believe we’re going to see a spike in interest from a broad spectrum of sponsors in every industry sector.

You can’t raise $13.6 million for just any sponsor and any deal, of course. Tom LaSalle, Jack Brandt, and their team at Tapestry have a remarkable track record in the senior housing space, and this was their third deal on CrowdStreet. CrowdStreet itself has a terrific and well-deserved reputation as a premier site. Put a great deal, a great sponsor, and a great site together and you get a terrific result.

But let’s not forget the most important factor of all (besides the lawyer, I mean). In the Moon Township deal, Tapestry and CrowdStreet gave about 280 accredited investors from all over the United States the opportunity to participate in the kind of investment once reserved for the wealthy. That is now, and will continue to be, the most important ingredient for success. When we talk about Crowdfunding as the democratization of capital, that’s what we mean.

Tapestry raised $13.6 million from 280 investors. There are close to 10 million accredited investors in the United States alone. To my mind, that means that the opportunity for growth, even within Rule 506(c), is practically unlimited.

So hats off to Tapestry and CrowdStreet, and on to the next deal.

Questions? Let me know.

Crowdfunding & Fintech for Real Estate Podcast

CF and Fintech for Real Estate Podcast

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Technology has made it easier to raise capital for real estate deals. Since Crowdfunding has grown exponentially, John Casmon, host of the popular Target Market Insights podcast, invited me on his show to learn more about crowdfunding and fintech (financial technology).  On this episode, I talk about different ways to use the internet to raise money and the impact new technologies will have on the way we buy real estate.

Key Market Insights

  • Crowdfunding is raising money on the internet

  • Two versions – donation based (think Kickstarter) and equity based

  • Crowdfunding is online syndication with 3 flavors: title 2, title 3 and title 4

  • All crowdfunding falls under the JobsAct

  • Title 2 is very similar to 506c for accredited investors

  • Title 3 is very different, can only raise $1MM annually

  • Title 4 can raise $50 million

  • FinTech – any technology disrupting the financial services industry

  • Many believe banks should be a disintermediary

  • Roboadvisor apps are apart of FinTech

  • Online syndication is not more risky than traditional syndication

  • Anytime you take money, you can be sued

  • When done properly, you should not be exposed to any actual liability – even if they lose money

  • Blockchain technology could disrupt the real estate industry

  • Blockchain is a database or ledger that cannot be changed and has no central authority – everyone must consent

  • Title companies and other “middle men” could be pushed away through blockchain

Questions? Let me know.

Tokenization: The Legal Take on Jobs Act Equity Crowdfunding and Security Token Offerings

Podcast: Regulation A+ Crowdfunding

Tokenization podcast MSR

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If you’re a entrepreneur, you’re probably looking for some way to raise capital. You probably have heard of crowdfunding, but you may not have heard of the Jobs Act of 2012 and how it relates to crowdfunding – which is significant because its potential is enormous. Besides Regulation A+, Reg. CF, and Title II crowdfunding options to name a few, now investors and issuers can take advantage of the “tokenization” of assets via Security Token Offerings based on blockchain technology. However, there are complicated rules associated with all aspects of crowdfunding, which is why it’s so important to have legal representation throughout all phases of the process.

In this podcast episode, we interviewed crowdfunding attorney Mark Roderick from Flaster Greenberg PC who gave us many insights on crowdfunding in general, plus his take on tokenization and what security tokens can actually do for issuers and investors alike. Forget what everyone says about raising money. As stated on the podcast, crowdfunding is a marketing business, but it’s smart to have legal counsel at all times too – which is why anyone thinking of getting involved with crowdfunding on any level would be wise to contact Mr. Roderick and read his crowdfunding blog where you can find hundreds of posts with excellent information dedicated to legal crowdfunding success. See that? Sometimes lawyers can be your friend!

And speaking of crowdfunding, according to Mark, about 90% of the Reg.A+ crowdfunding deals he’s seen is regarding real estate. You know what most of the Reg.CF deals are? (here’s a hint).

Questions? Let me know.

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