Warning for investors in film tax credits

Film tax credits are definitely big business. I doubt that they are very helpful to economies of the states that provide them, but they do probably help some otherwise commercially nonviable films get made.

Here's the warning: when investing in film tax credits, whether directly or by accepting them as security for loans, make sure your film and its business structure actually qualify. If the credit is disqualified because of an audit or other failure of paperwork, the taxpayer who received it will be the one to repay it.

There is no ambiguity in Bitcoin taxation.

Many people would like there to be ambiguity about Bitcoin taxation. That would be quite convenient, as many people would not like to pay taxes on their income from trading in Bitcoins. However, this is just one of the many subjects on which the tax law is already quite clear. If the IRS doesn't mess up enforcement (as it has done with equity carried interests), it has all the tools it needs.

Under U.S. tax law, most taxpayers have the U.S. dollar as their "functional currency." (It is possible to have a different functional currency, in which case that currency should be substituted for each mention of the "dollar" in this post.) If a taxpayer buys an asset for dollars, and later sells the asset for more or fewer dollars than it paid, it will have a gain or loss, respectively. It doesn't matter what the asset is: it can be as solid as an apartment building or as abstract as a fractional interest in the royalty stream from a musical recording. In fact, all currencies other than the taxpayer's functional currencies are such assets. Thus, it seems clear that a Bitcoin is such an asset.

It can be a bit tougher to track a Bitcoin than some other types of property. For example, if you sell stock, your broker will normally provide you (and the government) with a statement disclosing what you have done. Many, although far from all, other types of income, are subject to information reporting requirements. Even when no other party is required to report a transaction to the government, the taxpayer participating in the transaction is expected to report it. In an audit, the IRS will look at bank and other records to determine whether the taxpayer has failed to report any income. It does not seem any harder to find unreported income from selling Bitcoins than from selling, say, antique baseball cards.

That leaves only a "Hail Mary" argument against taxation of Bitcoin profits: that the Bitcoin is in fact the taxpayer's functional currency. That probably creates a definitional issue: the tax definition of "currency" probably excludes non-government issued assets. Furthermore, in the current state of the world economy, it is difficult to see how a taxpayer could carry on enough activities using Bitcoins to make them an actual functional currency. More to the point, the IRS shouldn't care: if your functional currency could somehow be Bitcoins you no longer would have taxable gain or loss when you disposed of Bitcoins, but you would have taxable gain or loss each time you disposed of dollars.

Another de facto tax haven eliminated

It appears that the nontaxable London pied a terre favored by many international oligarchs may no longer be available for tax-free wealth accumulation: nonresidents will pay capital gains tax on their U.K. real estate capital gains.

That certainly seems to be a reasonable quid pro quo for the benefits nonresident property owners enjoy when they acquire property one of the world's more desirable real estate markets. The opportunity to park immense amounts of wealth where it will be protected by a highly stable and nonconfiscatory government is certainly worth the small price of paying tax on increases in value; the fact that it is pleasant and convenient to visit adds further value.

The law change is an indication that the U.K. has realized it has some pricing power. There just aren't too many suitable places for the hugely rich to buy hugely expensive property.

Will this development drive the U.K. real estate market down? Probably not. The United States has had a similar regime in place for decades. California's recent "millionaire tax" tax increase may also be instructive: California raised its tax on very large incomes without experiencing a notable exodus of either wealthy taxpayers or businesses. Extremely desirable places to live can, and should, price themselves in accordance with demand.