Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long-term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous post delves into the benefits of a 529 savings plan. If you’re saving for your education or your child’s education and would like to utilize a tax-advantaged account, our last article will tell you everything you need to know! 
 
Today, we begin the first part in our series on cryptocurrency. Cryptocurrency is a hot topic and you might’ve seen a few news stories about new forms of cryptocurrency emerging and gaining popularity. In future posts, we’ll discuss the difference between certain types of cryptocurrency, as well as the risks and benefits involved in obtaining cryptocurrency. In this post, however, we want to give you an easy-to-understand overview of what cryptocurrency is. As well, we’ll dip our toe into the still-murky waters of tax law concerning cryptocurrency. None of the information in this article is financial advice, nor do we encourage you to invest in cryptocurrency. Our objective is to give you a comprehensive understanding of this new technology and its possible implications for our society. If you’re interested in learning more, keep reading!
 
What is cryptocurrency?
 
Cryptocurrency isn’t as mystifying as it first appears. In simple terms, cryptocurrency is a digital asset. Like your home is a real estate asset or the cash in your pocket is a liquid asset, cryptocurrency is based in the digital (or virtual) sphere. Similar to how dollars used to be backed by gold and silver, cryptocurrency is secured by cryptography. Cryptography is the “art of writing or solving codes. If you’ve ever seen ‘National Treasure’ or ‘The Imitation Game,’ you’ve witnessed cryptography in action. During the first world war, to ensure messages remained secure from the Central Powers, the Allied Powers used rotor cipher machines. During World War II, the Allies and the Axis used computers to encrypt their messages. The way encryption works is pretty straightforward. You begin with plain text. This plain text is when encrypted using an encryption key (i.e. secret algorithm). Without the encryption key, the text cannot be decoded from its unintelligible state. 
 
This encryption makes cryptocurrencies one of the most secure forms of currency, since it's nearly impossible to counterfeit or double-spend. The encryption which secures cryptocurrency exists on a decentralized network. A decentralized network means each node within the network (i.e. computer) has decision-making authority or necessary software capabilities; as opposed to a centralized network, in which instance control can rest in the hands of one individual, government, or organization. The decentralized network is based on blockchain technology, which we’ll discuss later on in this series. 
 
For the reasons stated above, cryptocurrency began as a currency which was not issued by a central authority and thus—theoretically—not subject to the control of a single government. This primary philosophy has resulted in cryptocurrency being used for illegal purposes, including to escape taxes. In the next section, we’ll discuss the societal implications of cryptocurrency, both positive and negative. 
 
Instead of dollars or bills, an individual unit of cryptocurrency is referred to as a “token.” Using a cryptocurrency system, sums of money can be easily transferred without the involvement of a third party (such as a bank or other financial institution). Instead, a user has both a “public key” and a “private key,” which serve as their unique signature to approve financial transactions. There are negligible fees associated with these transactions, as well. 
 
You might be wondering: How does cryptocurrency make money? This is an article in and of itself, as there are a few ways to make money from mining and investing in cryptocurrencies. We’ll cover this in more detail in the future, so make sure you return for the rest of the series! 
 
What potential does cryptocurrency have for our society?
 
Cryptocurrency has the potential to revolutionize the way financial institutions and law operate in our society. Major institutions, such as JPMorgan and Chase, view cryptocurrency as an opportunity to streamline payment processing and lower associated fees. For others, the long term implications could include online voting and crowdfunding. Below, we’ll discuss the major benefits and drawbacks of cryptocurrency becoming the way we spend our money. 
 
    Potential Positives
 
The inflation rate for the U.S. dollar in 2020 was one-point-four percent. Inflation is the process of rising prices which results in the devaluation of individual units of currency. Or: Your money gradually lessens in value year after year. One of the potential benefits of cryptocurrency is its inflation resistance. For example, there are only twenty-one billion bitcoins in existence. Unlike the dollar, new bitcoins are not created to manipulate the value of the currency. 
 
Cryptocurrency is also lauded for its portability and divisibility. Cryptocurrency exists only in a virtual capacity. Therefore, unlike cash or large tangible assets (e.g. cars, houses, boats), the currency can be easily transferred or accessed by anyone with a computer. Similarly, most cryptocurrencies are infinitely divisible. While the dollar can be split into quarters, dimes, nickels, and cents—cryptocurrency can be into infinitesimally small fractions of itself. 
 
    Potential Negatives
 
As we briefly mentioned above, the anonymity of cryptocurrencies encoded networks allows a relatively safe haven for criminals and those seeking to evade paying taxes. In the next section, we’ll discuss how the IRS is attempting to crack down on cryptocurrency as an industry. Besides its potential to offer refuge to criminals, cryptocurrency can also be extremely volatile. Much of a cryptocurrencies value is tied to its perceived value, meaning this metric can vacillate with news events. Most currencies gain and lose value this way, but since cryptocurrency is digital and can be easily divested from, this volatility is much more drastic. 
 
Likewise, since cryptocurrency is digital, the currency is susceptible to digital attacks. Vulnerabilities within the blockchain software are prime targets for hackers, bugs, and malware. If a cryptocurrency is compromised, countless individuals' private information and funds are up for grabs. However, this is a problem faced by cryptocurrencies and financial institutions alike as we move into an age when most robberies are cyber-based.
 
Current Tax Law Concerning Cryptocurrency
 
According to a notice issued by the IRS in 2014 (2014-21, 2014-16 I.R.B. 938), virtual currencies are treated as property for Federal income tax purposes. Therefore, capital gains and losses must be reported. Until now, cryptocurrency has been largely difficult to track and tax. This inability contributes to a gap between how much money the IRS collects and how much money the IRS estimates is due. The cryptocurrency market is worth nearly two trillion dollars; and, at certain times during this year, three trillion dollars. The latest infrastructure bill, which was passed in the Senate on August 10th, includes a new requirement for brokers to report gains and losses to the IRS. This clause stirred discontent within the cryptocurrency community, fostering a fear of intense oversight and reporting obligations. The U.S. Department of Treasury has since clarified its definition of a brokerage includes “entities that transfer digital assets on behalf of another person.”  As well, reporting rules will not go into effect until 2023. Lawmakers hope new reporting rules will help raise money for planned infrastructure (estimated to cost one-trillion dollars) over the next ten years. 
 
 
We’ve only just scratched the surface with what cryptocurrency has to offer. We hope this article provided an uncomplicated entry point into the world of cryptocurrency. Make sure you come back for the upcoming portion of our series, where we will differentiate between multiple forms of cryptocurrencies and discuss how individuals make money from digital currency. We’ll also cover a host of need-to-know terms. Stay tuned! 
 
As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading!
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Hello, readers! Welcome back to the Hoods Tax & Accounting blog! We’re delighted to be able to share up-to-date information about taxes, savings, and financial literacy—giving you the tools you need to meet your short and long term goals. Whether you’re managing taxes for your small business or wondering how to take advantage of certain tax credits, we’ve got you covered! Our previous post about how to avoid impulse spending is available for your reading pleasure and we hope you’ll return to the blog for our upcoming series on cryptocurrency!
 
Today, we’ll be discussing a hot topic for parents and students alike—a college savings plan! Most parents save for their kids college fund the old fashioned way, by allocating a portion of their monthly income into a standard savings account over a number of years. However, we are here to tell you there’s a better way! There are savings plans created specifically for the purpose of paying for your child’s education-related expenses and which allow multiple family members to pay into the fund! According to Peter Mansfield, the chief marketing officer for U-Nest (an app which allows savers to open 529 plans), about seventy percent of families are unaware 529 plans exist. And, according to a 2018 study done by Morningstar, families are missing out on an estimated $237 million in future educational savings due to the misuse (or lack of use) of 529 savings plans. 
 
In this article, we’ll discuss what a 529 savings plan is, its stipulations, and its benefits. Therefore, if you’re interested in making your money work for you, read on!
 
What is a 529 Savings Plan?
 
A 529 savings account is a tax advantaged savings account which allows for tax-free growth and tax-free withdrawals on qualified expenses. Traditionally, these savings accounts have been used to pay for expenses related to attending colleges and universities, including: 

• Tuition
• Room & Board
• Books
• Fees

In actuality, there are two types of 529 savings plans. The first type of plan is referred to as the prepaid tuition plan. This plan allows individuals to buy tuition credits for future use at today’s prices. However, the prepaid tuition plan cannot be used to pay room and board or expenses unrelated to tuition. Which is why the second type of 529 savings plan—the education savings plan—is considered the more flexible option of the two. The education savings plan allows individuals to pay for any of the education-related expenses stated above. As well, this type of plan can be invested in higher-risk, potentially higher-return options like stock funds. Though, keep in mind, the value of this savings plan is not insured by either state or federal governments. This means potential losses are your responsibility. 
 
How do I set up a 529 Plan?
 
Before setting up a 529 savings plan, you’ll want to shop around at a multitude of financial institutions to find the best option for you. The key elements to keep in mind when comparing savings plans are: low costs, good benefits, and a solid investment track record. Low costs means the institution isn’t charging outrageous fees to open an account or for its servicing of your account. Any money spent on fees is money which isn’t going into your account. Good benefits could include tax deductions for contributions. Only select states (i.e. Arizona, Arkansas, Kansas, Minnesota, Missouri, Montana, and Pennsylvania) offer deductions on state income tax for contributions to a 529 savings plan. Finally, a solid investment track record means the institution has shown a consistent ability to increase its savers’ contributions (especially in years when the market did well). Depending on your goals and the age of your child, you might prefer an institution with a more aggressive or conservative investment style. 
 
Next, you’ll want to name a beneficiary. This can be your child, grandchild, niece, nephew, or yourself. Yes, that’s correct—you can open a 529 savings plan for yourself. If you’re looking to accelerate your career by going back to school or switching your career entirely, a 529 savings plan can be used for eligible graduate programs. Or, you might consider investing in a 529 savings plan as a career emergency fund. The coronavirus pandemic saw massive job loss and wage cuts. Many individuals are rethinking their career path and their job security in the wake of the pandemic. A 529 savings account can be a good way to prepare for the unexpected. 
 
You’ll need to name contributors. Again, this can be anyone related to you or your beneficiary. 
 
After you’ve set up your account, chosen the type of savings plan you prefer, named a beneficiary and contributors, the only thing left to do is contribute after-tax money and watch your savings grow! 
 
How did the SECURE Act change 529 Plans?
 
The SECURE Act, passed in 2020, changed how the 529 savings plans could be utilized and actually broadened their use. Now, the list of qualified education-related expenses extends to upgrading technology (such as computers and laptops), purchasing printers, internet service, necessary software, and anything else required by the beneficiary’s institution to adequately complete their education. 
There’s more! The education savings plan can now be used to cover K-12 private school tuition (some limitations apply). This means you can invest in your child’s entire education before they’re even born! 
 
As well, 529 savings plans have been approved to pay off up to $10,000 per year in qualified education loan repayment. Student loans have been a hot topic as of late, as more and more studies show the millennial generation struggling to retain wealth at the same rate as their predecessors due to crippling student loan debt. No parent wants to see their child struggle to live because they choose to pursue an education. Likewise, no individual wants to be plagued with paying student loans for upwards of thirty years. Even if you did not invest into a 529 savings plan prior to your child going to college, you can still help them pay off their loans quicker!
 
Hold on, there’s more! Registered apprenticeships, certified by the U.S. Department of Labor, are also eligible to be paid for with 529 savings funds. Apprenticeships are an avenue to earn credentials and experience, learn a craft hands-on, and jumpstart your career. Certified apprenticeships might include software engineering, business analysis, or even working on The Late Show with Stephen Colbert! To explore potential apprenticeship opportunities, click here.  
 
We’re almost finished! Finally, if the chosen beneficiary of a 529 savings plan does not utilize the entirety of the savings fund, the remainder of the funds can potentially be transferred to a qualified sibling or relative! You can rest assured knowing each dollar you put into a 529 savings plan can be used to your or your child’s benefit. 
 
 
To reiterate, the benefits of a 529 savings plan are: The ability to have your savings invested and grow at a rate far faster than an average savings account. The ability to both investment gains and tax benefits, including the state income tax deduction (in qualifying states). The flexibility to choose the plan which works best for you and your family. The ability for multiple family members to contribute to a single plan, as well as for a single plan to rollover to multiple family members. As well as much, much more! The benefits of a 529 savings plan for families and individuals are endless. Allow your savings to work for you and invest in a 529 savings plan today! 
 
As always, we’re happy to be able to provide you with the most relevant, up-to-date tax information for you and your family. From savings plans to tax credits to business acumen, the Hoods Tax & Accounting blog is your one-stop shop for everything you need. We offer tax preparation, bookkeeping, payroll, and QuickBooks services. If you have any questions or are interested in a consultation, please reach out! We do offer virtual consultations over Zoom, as part of our effort to accommodate everyone in these trying times. We look forward to hearing from you! Until next time, thank you for reading!