The Foreign Service Journal, January-February 2023

THE FOREIGN SERVICE JOURNAL | JANUARY-FEBRUARY 2023 61 1099-K: Payment Card and Third-Party Network Transactions The reporting requirements for business transactions processed through third-party payment settlement entities (PSE) such as Venmo and PayPal have changed beginning with 2022 transactions. A taxpayer who receives amounts from business transactions through a PSE that exceed $600 (regardless of the number of individual transactions) will be issued a 1099-K by the PSE for 2022. The 1099-K will need to be accounted for on the taxpayer’s 2022 tax return. Readers should ensure they code transactions through PSEs correctly so only business-related transactions are reported on Form 1099-K. Readers should also confirm if the pay- ment service they are using is a PSE. Certain money transfer services, such as Zelle, are not PSEs and are not required to issue Form 1099-K. Virtual Currency / Digital Assets In recent years, the IRS has placed increased scrutiny on virtual currency transactions (now referred to as a digital asset, along with many other types of digital assets such as NFTs). The draft 2022 Form 1040 illustrates this increased scrutiny by requiring taxpayers to confirm in a check box on page 1 of Form 1040 whether the taxpayer received as a reward, award, or payment for property or services or sold, exchanged, gifted, or otherwise disposed of any digital asset or a financial interest in any digital asset during 2022. In addition to confirming if a reportable transaction occurred during 2022, members must be sure to complete the forms necessary to report the transaction when required and any resulting income or deductions. Further, virtual currency / digital assets held in accounts outside the United States should be reported as a foreign asset on the FinCen114 (FBAR) and Form 8938 if reporting thresholds are met. The IRS has provided FAQs related to virtual currency, which can be found at https://bit.ly/virtual-currency-transactions. Readers should particularly note that taxpayers who use virtual currency to pay for goods or services or who sell virtual currency must report the transaction(s) on their income tax return. Taxpayers who receive virtual currency as payment for services must report currency received as income on their tax return. Virtual currency that a taxpayer holds as an investment is generally taxed as a capital gain or loss, as described in the preceding section. Many other types of virtual currency / digital asset transactions must also be reported on the taxpayer’s tax return. AFSA recommends consulting IRS Notice 2014-21, Revenue Ruling 2019-24 and the FAQs to determine the tax treatment, if any, of a transaction. Investments in Real Estate Taxpayers generally invest in real estate in five scenarios: Scenario 1: To live in as their personal residence. Scenario 2: For use as a vacation home. Scenario 3: To live in as their personal residence, but may rent it out at times when not living in it. Scenario 4: To rent to a third party strictly for investment income purposes with no personal use. Scenario 5: To rent as a short-term rental (e.g., Airbnb). Adjusted Basis In all five scenarios, it is important to properly calculate the adjusted basis of the property. Please refer to Tax Topic 703; Publication 551; Form 1040 Schedule D with instructions; IRC Sections 1011, 1012, and 1014 through 1017; and associated tax regulations beginning at 26 CFR Sec. 1.1012-1. Recent iterations of the annual tax seminar offered by the Foreign Service Institute have illustrated how mistakes in tracking basis can result in incorrectly calculated depreciation of rental properties and incorrectly reported gain or loss from the sale of real estate. Please contact the FSI Transition Center for a link to view the most recent seminar, which discusses the permitted approaches to correct mistakes in basis. Scenario 1: Personal Residence Never Rented. While living in the property as a personal residence, a taxpayer may deduct mortgage interest and property taxes as an itemized deduction on Schedule A, subject to limitations. Current tax law allows a taxpayer to deduct mortgage interest up to cur- rent mortgage limits ($375,000 MFS/$750,000 MFJ unless the mortgage meets the requirements for grandfathered mortgage limit of $500,000 MFS/$1 million MFJ) for up to two properties, a personal residence, and a second home person- ally used by the taxpayer. Interest paid on home equity loans (including popular HELOCs) is no longer deductible unless the proceeds from the loan are used to substantially improve the property on which the HELOC is taken, and the total mortgage loan balance (including home equity loans) stays within the permitted mortgage limits. Scenario 2: Vacation Home. A vacation home is a home that may be used by you and is rented out at times during the year. If you use the vacation home without renting it out, you may deduct the mortgage interest and property taxes on Schedule A, subject to limits as described in Scenario 1. If you rent out your vacation home for less than 15 days during the year, you are not required to report the rental income on your tax return and you may still deduct the mortgage inter- est and real estate taxes on Schedule A. If you rent the vaca- tion home out more than 14 days, but use it personally for the greater of 14 days or 10 percent of the number of days rented, it is considered a personal residence and you may not deduct