Tax Memo (crypto)

You have accepted a position as a staff accountant in the tax department of a mid-tier San Diego accounting firm. Your first client assignment is for a local business owner, Scott. Scott owns a real estate investment business where he purchases rundown houses, fixes them up, and then either resells them or rents them out. Scott incorporated his business in 2017, Sunny San Diego Investments Inc (SSDII). You received the email below from your manager on the client team. Although you are nervous about the prospect of your first research question at your new job, you remember all that you learned in your tax class at SDSU, and you are ready to tackle this! You recall learning how to format a clear tax memo for your client file, and how to find and reference primary tax resources to support your answer.
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Good morning Tax Staff,
I got an email from our client, Scott, this morning. SSDII has made some new investments during 2021, and he has questions regarding the taxation of these investments. Please see his email below and prepare an internal memo for the client file. I need you to send me this memo by Sunday, April 10, at 11:30pm, so that I can have the information prepared for our client call on Monday morning April 11th.
I look forward to reading the findings of your research!
Tax Manager
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Fwd email:
Hi Tax Manager
As you know SSDII has successfully been making real estate investments since our incorporation in 2017. This past year our management team decided to expand our investment portfolio and enter into the exciting world of cryptocurrencies. As I’m sure you know, the cryptocurrency market can be pretty volatile, so we have been trading in and out of various positions of Bitcoins, Ethereum, and Solana on a monthly basis. As I’m preparing my year-end documents to send over to you for tax preparation, I came across a news article about crypto taxation that was concerning. The article looked at the Build Back Better Act that was passed by the House of Representatives in November. Apparently there are provisions in this bill, concerning cryptocurrencies and changes to the wash sale rules, that seem like they could have some negative tax implications for me. Since SSDII is new to securities investments, I don’t understand what these wash sale rules mean and whether I need to worry about this for our 2021 tax returns. Can you help me understand this new business venture? What are the tax implications of our crypto investments? What are the wash sale rules? Will they impact my crypto investments in 2021? What about in future tax years? Is there anything I should do to prevent having tax problems going forward?
Thanks for your help!
Scott
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