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san jose tax lawyerCryptocurrencies such as Bitcoin and Ethereum have become more and more popular in recent years, and they are now widely used for multiple purposes. Some employers may pay employees in virtual currency, and these currencies may be used to purchase goods or services. Cryptocurrency can also represent a valuable investment, and as the value of different virtual currencies increase, they may be sold or transferred, allowing investors to earn significant profits. For those who have invested in cryptocurrency, it is important to understand the tax implications, including the gift taxes or estate taxes that may apply to certain types of transfers.

Taxes Issues Affecting Cryptocurrency Gifts and Donations

The IRS treats cryptocurrency as property, meaning that when it is sold or transferred to another party, capital gains taxes will apply to the gains or losses. For example, if cryptocurrency were valued at $1,000 when a person originally acquired it and it was worth $2,000 when it was sold or exchanged to someone else, this would be considered a gain of $1,000, and the person would be required to pay capital gains tax on this amount.

When giving cryptocurrency to someone else, gains or losses usually will not need to be recognized. However, gift taxes may apply depending on the value of the cryptocurrency at the time of the gift. The gift tax exclusion amount for 2022 is $16,000, so no gift taxes will apply if the value of cryptocurrency given to a single person within the 2022 tax year is below $16,000. If the amount of a gift exceeds this limit, the person giving the gift will be required to pay gift taxes on any amounts above $16,000.

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san jose tax lawyerTaxpayers in the United States often have difficulty navigating the complex tax laws. For U.S. citizens or residents who live in other countries, these issues can become even more complicated since a person may be required to pay U.S. taxes on income they earn, and they may also need to pay taxes in that country as well. Fortunately, U.S. taxpayers who live abroad can take advantage of a number of benefits that will allow them to address their tax issues properly and avoid unfair financial burdens. However, they will also need to make sure they are properly reporting their foreign income and the assets they own in other countries, which will help them avoid potential penalties.

Tax Benefits for Those Who Live Abroad

To address the concerns that affect taxpayers who live primarily in another country, the Internal Revenue Service (IRS) has made the following provisions:

  • Automatic extension - Most taxpayers are required to submit their annual income tax return to the IRS on April 15. However, those who live outside the United States or Puerto Rico will receive an automatic extension of 2 months, as long as they can show that their main place of business is outside the United States or Puerto Rico or that they are on duty outside the United States or Puerto Rico as a member of the military. 

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san jose tax lawyerBusinesses will need to address multiple types of tax issues, including paying all required employment taxes. One of the key issues that can affect these taxes involves how workers are classified. Different requirements apply for employees and independent contractors, and by ensuring that workers are properly classified, an employer can avoid potential penalties or other problems 

Understanding Federal Tax Requirements for Employees and Independent Contractors

Employees who work directly for an employer have certain rights, including the right to receive a minimum wage and overtime pay. They can also receive certain benefits, including workers’ compensation for work-related injuries or illnesses, unemployment insurance, and other benefits provided by an employer, such as sick pay, vacation or personal days, and the ability to participate in a health insurance plan or an employer-sponsored retirement savings account.

For workers who are classified as employees, an employer is required to withhold employment taxes from their wages, including federal and state income taxes, as well as Social Security taxes, Medicare taxes, state unemployment insurance, and state disability insurance. For independent contractors, this withholding is not required, and an employer will instead use Form 1099-NEC to report payments that are made. The worker will pay income taxes to the IRS and state tax authorities such as the California Employment Development Department (EDD), and they will also pay self-employment taxes.

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san jose tax lawyerBusiness owners will need to address multiple types of tax issues, including withholding payroll taxes from employees’ incomes and paying these taxes to the IRS and the California Employment Development Department (EDD). These issues can become more complicated when a business hires independent contractors or when other types of payments are made. In general, payments that are reported on 1099 forms do not require a payer to withhold taxes. However, there are certain situations where the IRS may require backup withholding.

What Is Backup Withholding?

Form 1099 is an information return that lets the IRS know about certain types of payments made by a business. The recipients of these payments are expected to report and pay taxes on these payments. However if there are issues related to the reporting of payments, a payer may be required to withhold a certain percentage of these payments and pay these taxes to the IRS. The tax rate for backup withholding is 24 percent.

In most cases, backup withholding will be required because the recipient of payments failed to provide a correct taxpayer identification number (TIN). A TIN may include a person’s Social Security Number (SSN), an individual taxpayer identification number (ITIN), or an employer identification number (EIN). If a TIN is missing or incorrect, the IRS will notify the payer that they may be required to begin backup withholding for any payments made to the payee.

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san jose tax lawyerDuring the business formation process, a business’s owner, partners, investors, or shareholders will need to determine how the business will be structured. The selection of a business entity may determine how a company will be organized and managed, and it will also affect the taxes that the business will need to pay. By understanding how taxes apply to different types of business structures, owners or partners can determine which type of business entity will provide them with the most benefits.

Taxation for Different Types of Business Entities

The structure of a business will determine whether income taxes will apply to the business itself or to its owners, partners, and shareholders. If a business is a pass-through entity, profits and losses will be passed through to those who have an ownership share in the business, and individual income taxes will apply to these amounts. 

Some commonly used business entities are taxed as follows:

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