So you thought 2020 was a challenge? Not even two months into 2021 and the groundwork is being laid for a year that may rival 2020 in terms of complicating factors for tax professionals.
Right out of the gate, this year has provided some intriguing storylines that undoubtedly will have ripple effects when tax pros sit down with their clients next winter. And while these practitioners may have enough on their plate right now withthis tax season’s challenges, these are the issues that are simmering on the burner that are likely to have them reaching for the aspirin bottle in 12 months’ time.
Stimulus: round three
While I’ve detailed some of the confusion that taxpayers have regarding their first two rounds of stimulus, any further payment from the government is sure to multiply these issues. And a third round of stimulus does, in fact, seem likely.
This month, House members began drafting the $1.9 trillion coronavirus stimulus bill, which includes $1,400 per person payments for individuals making up to $75,000 and married couples earning up to $150,000. The proposal would provide $1,400 for each child. The payments would cut off entirely for individuals earning more than $100,000 and married couples earning more than $200,000.
So if tax pros had a hard time getting clients to recount how much money they received last April or December, imagine asking about February 2021 in February 2022? There’s a simple workaround: Make sure your clients are diligent in tracking these payments, but that always proves easier said than done.
The Reddit stock explosion
Even if you’re not a stock jockey, it was hard to miss the explosion and subsequent fall of GameStop and AMC stock.
Fueled by Reddit investors from the sub-Reddit “WallStreetBets,” the struggling brick-and-mortar gaming store and the movie theater chain rallied beyond belief. On Jan. 11, GameStop closed the day trading at $19.94 a share. The stock peaked on Jan. 27 at $347.51 a share, a whopping 1,643 percent increase. AMC surged from $4.96 a share on January 26 to $19.90 a share the next day: a 301 percent single-day increase.
Needless to say, there are going to be a lot of traders that cashed out with some nice returns. Some of these will be novices, not used to pulling capital gains out of the stock market. And that’s where the challenge begins. Many of these traders will be shocked by their tax bills, which will feature hefty short-term capital gains.
Tax pros need to ensure that, if their clients did benefit from this day-trading phenomenon, they’re ready to claim it on their 2021 returns. Similar to the challenge with the stimulus, February is a long ways away from next year’s filing deadline.
Crypto’s new hero
Another hero of the pop culture stock market crusades was Dogecoin, a cryptocurrency created in 2013 that its founders literally called “a joke.” But even amid its comedic origins, the coin has actually led to some practicality on social media, inspired celebrities like Elon Musk to sing its praises, and now, produced serious gains in the market.
In a single day in January, Dogecoin jumped 686 percent, and from Jan. 27 until its peak in value on Feb. 8, saw a 717 percent spike. But since a single Dogecoin is so affordable (even at its peak, one coin costs less than a penny), all the pitfalls of novice investing are at play here, with all the complications of cryptocurrency.
I’ve documented the murky waters surrounding cryptocurrency for the past few years, and they haven’t gotten much clearer. As virtual currency becomes even more popular and accessible than it has been in the last five years, practitioners will continue to struggle with the tax treatment of these items, and again, struggle to make recommendations to their clients that will ensure their compliance.
Diligence is key
As always, staying informed in a fast-paced landscape is vital for tax professionals to better protect and serve their clients. Where 2020 showed us how fickle everyday life can be in an interconnected world, 2021 has taught us how we all can be swept up in an instant simply because of a populous movement on the internet. While that may be a disorienting thought, for taxpayers and practitioners alike, the best thing we can do is to always be prepared. For tax pros navigating all of this, proactive communication with clients now is key to minimizing surprises for next year.