Forsage partners own smart contracts and by referral , partners earn Ethereum virtual currency. This would be a Schedule C, as it is actively running business, therefore, all their commission paid in ETH is taxable and Virtual Currency and Smart Contracts

[dbtaxsolutions]

Forsage partners own smart contracts and through referrals , partners can earn Ethereum virtual currency. This would be a Schedule C, as it is actively recruiting and running a business, therefore, all their commission paid in ETH is taxable and subject to self employment income.  Am i correct? I read the FAQs in IRS about Virtual currency, just want to confirm here.

A partner can use those ETH commission to buy more contract in order to have more commission opportunities. 

I think there is 2 part to this, the commission earned as taxable income, and later on when ETH is converted to dollar or withdrawn, it will result in capital gains depending on basis and market value of ETH. 

Am I understanding this correctly?

If one individual owns $100 000 worth of ETH, a US resident, do they need to file FBAR?I don't follow the need for FBAR, is it because it is digital currency?

Smart contracts I think would be intangible assets and can be depreciated as such, can it qualify for section 179? I think it can, again, I am hoping to verify what others think of it. Thank you.

Sorry for the multiple questions, i wanted to keep this info in one file concerning Forsage smart contracts as it is growing rapidly here in US a lot needs a better understanding on tax consequences of this. Thanks

[dbtaxsolutions]

Once a partner buys a contract (level 1 to 12), it's non refundable, you cannot get it back. The only way to get your investment back is to earn commission by referral, and get paid in ETH. I think everything goes in schedule C here, no passive income. So in schedule C, 

Revenue (commissions)

Expenses:  Depreciation (section 179 of intangible asset, the smart contracts)

If ETH as virtual currency considered as "property" an asset, how is it depreciated? It can't be, so you don't include it in asset worksheet. So you would then use Sch D, can this be linked to that Schedule C so that it is not passive income/rather an active income or is it passive income? I am uncertain as to the commission being taxed as earned income, but if they have not cashed out the ETH, and when they do and somehow it is a loss, it will be a capital loss that will need to be applied to capital gain (not against ordinary income they were taxed on). 

Thank you.

[qbteachmt]

The contract might depreciate (it isn't clear what was contracted for), but ETH won't depreciate. It's the Currency, which is a different type of Asset. Tangible goods that "wear out over time" while in use is why they Depreciate = the value is lost a bit by nature of that use.

Currency is Held. It isn't "wearing out." It isn't "in use." It simply exists. All of your money in regular banks is not depreciating.

When you are paid by anything, including Chickens, you use FMV of that payment in exchange for what you were paid for. If I do $500 worth of work, but accept $200 value of ETH, then I got paid $200, not $500. And later, if I trade/convert that ETH for $5,000 US, that is the gain on the trade from $200 basis.

Is that what you are asking?

[dbtaxsolutions]

I get all that. Say I own the Schedule C, and I own the contracts (these smart contracts are right to earn Ethereum through referral. The contracts are life time, I own it. Whether I want to continue with this business or not, it's there recorded on the block chain that I own this contracts, can't resell it.

I guess since there is no resell value, it would just have to be expensed, the contract price could depreciate or appreciate as people buy depending as it is tied to the market value of ETH. But the once I purchased, it's  a sunk cost. Smart contract are purchased in level 1 to 12, level 12 can cost $120 000. Level can be $28. (again depending on ETH price but this is close to approximation recently). 

The contracts would be asset in which case I can claim section 179?

Commissions earned = Schedule C

ETH sold at appreciated value = Schedule D (can this be linked to Schedule C)? The reason i was asking is if I have a capital lossl since there is capital loss limitation, i would want it to apply to ordinary gain in my schedule C. 

FYI, the company is Forsage if you want to look it up and if interested let me know.  It is sort of "mining" or earning  for ETH through referral base.

Thank you.

[itonewbie]

---

@dbtaxsolutions wrote:

...Expenses:  Depreciation (section 179 of intangible asset, the smart contracts)...

---

Where under §179 do you find that this code section would be applicable to intangibles (other than certain computer software)?

You got me curious, so I looked up a bit on the Internet how this Forsage Smart Contract System works.  From what I can tell, what your client paid for is some sort of registration fee for participation - that, in itself, is not a fee for smart contracts.  If anything at all, the closest thing my little brain can think of is §197 intangibles with an amortization period of 15 years.

There is quite a bit of coverage that the "system" has the hallmarks of a modern-day electronic ponzi scheme although the company has self-published various press releases, which anyone can do (as if those were news reports), to assure readers that it is not.  In fact, the SEC in the US has issued warnings about cryptocurrency ponzi schemes and a warning specifically against Forsage was recently issued by the SEC in the Philippines.

I would tread carefully in this space, tighten up the due d, and document my discussions with my client about the implications if I were you.

[dbtaxsolutions]

It is a crowd funding group, you can actually call directly to SEC and they have no nay or yay about it as it is not required to be registered with SEC, it's not trading, rather it is crowd funding. 

Did you see the prices for each contracts, they are referred to as smart contracts, basically giving right to earn ethereum commission. 

Not sure how this will be depreciated, it is definitely an asset, but how to depreciate is the question.

Thanks

[dbtaxsolutions]

Forsage promotes it as passive income, but I think it is "active income" for the commissions, then later on if commissions were held on long position and appreciates in value then sold, then it would be capital gain. that's my take, any ideas?

[itonewbie]

Not sure how this will be depreciated, it is definitely an asset, but how to depreciate is the question.

@dbtaxsolutionsPlease see the posts above for the answer you need. It's already there.

[dbtaxsolutions]

thanks

[itonewbie]

---

@dbtaxsolutions wrote:

It is a crowd funding group, you can actually call directly to SEC and they have no nay or yay about it as it is not required to be registered with SEC, it's not trading, rather it is crowd funding. 

---

How it labels itself is not important.  It's the substance that matters.  You will need to exercise your professional judgement to determine the proper tax treatment.  This Community is here to help people bounce off and flesh out ideas.  No one will be able to confirm one way or the other.  Even if there is, that wouldn't give you any validation or defense in case of an audit.

[qbteachmt]

How it markets itself is Marketing; not Factual. I can call it Quantum Rights, for instance.

"If anything at all, the closest thing my little brain can think of is §197 intangibles with an amortization period of 15 years."

It seems more like Oil & Gas royalty, where the life isn't really know (we were told it's for life) as far as the activity goes. You take a deduction as a flat depletion against income.

It seems you pay to play = paid money to get commissions from others who pay money to get commissions. That screams Ponzi, even over text.

"Forsage promotes it as passive income, but I think it is "active income" for the commissions, then later on if commissions were held on long position and appreciates in value then sold, then it would be capital gain."

The Sched C means you are running a Business.

The Sched D means you have an investment.

Both are part of Form 1040 for that person.

[qbteachmt]

"Not sure how this will be depreciated, it is definitely an asset, but how to depreciate is the question."

There is no given requirement that something depreciates. Try investing in Art, for instance. That doesn't depreciate on taxes or appreciate on taxes. You will have gain or loss when it sells.

I looked it up, too. Whew. Even the server community seems to consider it is a Ponzi scheme.

"The contracts are life time, I own it. Whether I want to continue with this business or not, it's there recorded on the block chain that I own this contracts, can't resell it."

How can you have Active Income from something you can never get rid of and once bought in, need do nothing to get it? They market it as Passive, but you declare it Active, but there is no business being covered. Crowd-Funding is more like a lending operation. So, which is it: business commission or funding activity?

And how are you a Partner? You bought into a program, not into the entity as Partner, right?

What do you get at year end, along with the statement? Do you get a US tax form, such as 1099 or K-1?

[dbtaxsolutions]

"It seems you pay to play = paid money to get commissions from others who pay money to get commissions" -- this is exactly right. However, once  an individual build enough team under her/him, he or she can get what they call "spill over" commission. No body can seem to explain how the spill over commission gets distributed as it is something to do with computer algorithm and it is random. Individuals have earned ethereum commissions without having referred anyone. 

I thought about the smart contract as more like a royalty like you said. 

I am wondering the same thing whether someone gets 1099 Misc or 1099K.

Still searching on IRS website but no luck yet so far other than the FAQs on virtual currency. Thank you.

[itonewbie]

---

@dbtaxsolutions wrote:

...I thought about the smart contract as more like a royalty like you said...

...I am wondering the same thing whether someone gets 1099 Misc or 1099K....

---

What is your basis for thinking what your client paid is "like a royalty"?  Royalty, from a tax perspective, generally entails payment in exchange for a license to use a property, typically an intangible property or a right relating to the development of natural resources.

1099-MISC is not applicable to royalty payments made to corporations.

[IRonMaN]

I'm still trying to figure out what forsage is.  I get confused by words that are bigger than 4 letters. 😕

[qbteachmt]

"gets 1099 Misc or 1099K."

1099-Misc would be if this is considered commissions or royalties. The payers make that determination.

1099-NEC would be if this is considered income. The payers make that determination.

1099-K is from a Payment Settlement Agent, where you are treated as receiving payments from the reporting entity acting as a financial institution to you. The reason you got funds through them could be that you sold a bunch of horses, even, because it based on number of transactions and total processed. I doubt this would apply to Forsage.

K-1 is what you get as the reporting when you are a Partner or Shareholder in an entity. Their tax preparation results in this personalized form being sent to each stakeholders.

You are not a Partner. It's like WalMart hiring people not calling them Employees, but calling them Team Members or Partners. That's just marketing and not the fact of the relationship. Pretty words don't change anything. However, there is no such thing as crowd-sourcing sustainable money gifting; that makes this a pyramid scheme. I would never put any part of this on any tax form.

All of this seems new for 2020. I think you should read this:

https://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf

[itonewbie]

---

@IRonMaN wrote:

I'm still trying to figure out what forsage is.  I get confused by words that are bigger than 4 letters. 😕

---

ACME is what you're looking for. 😎

[dbtaxsolutions]

Because the smart contracts are more like license to earn commissions? An individual can earn commission without referring another person directly. They get a spill over commission, although it is random and rare, it happens. That is all the basis I have. I highly doubt individuals will get 1099 Misc, because owners of smart contracts now is over a million believe it or not.

Thank you

[dbtaxsolutions]

Thank you.

In the end, i am still not sure how to help this tax client. It has to be reported, as they have a lot of virtual currency involvement in this "business" and many have earned commission in thousands....

[dbtaxsolutions]

Funny. lol

[itonewbie]

You keep referring these payments both made and received by your client as being for "smart contracts".  What is clear from the materials available on the internet, these are for referrals (which resemble Ponzi schemes, IMHO, and from the perspective of other observers on the Internet as well as the SEC of the Philippines) and not for processing "smart contracts".  If it's for the latter, that would amount to mining, which is covered by the guidance issued by the IRS.

[dbtaxsolutions]

https://www.forsagelevels.com/?fbclid=IwAR14jutetqoz2v2B9KdGoD011F3D3j1cb8JKnKCCk2yGmufO1MSRx3B4Q7c

Here is a link to the prices of Levels, i mean level 12 is $122 000+, that's a lot and the individuals that are at level 12 has made over half a million probably and has no problem buying at this level. How do you account for this? once purchase you cannot  resell it. 

[qbteachmt]

"It has to be reported, as they have a lot of virtual currency involvement in this "business" and many have earned commission in thousands...."

You asked about Sched C. You don't report on taxes when you take money from personal checking to start the business checking account. There is no Expense and nothing Depreciates.

You also describe "active" income, Active recruiting, and now, earning commission with no recruiting. Reporting the commission and reporting under the virtual currency rules are different than the Business part of this question. Your question has many parts to it.

I see this as: Your client invested in a currency conversion scheme as a gifting pyramid. I can see reporting the income, and later, the gain or loss. Running it as a business and calling it active would be a bit of stretch. Even Forsage referred to it as Passive Income according to your comments here. Are you sure the "commissions" are not simply an accrual into the virtual currency wallet, more like currency trading? Sched D vs C.

[qbteachmt]

"How do you account for this?"

Just because something is Costly, does not make it part of Tax reporting. You can throw away all the money you want on the local street corner.

"i mean level 12 is $122 000"

And if you buy that much of Oracle or GM stock, there is nothing to report about that investment; you Hold that as your asset. It doesn't depreciate on taxes, because it is not wearing out. It's a different type of Asset. You know that part.

"once purchase you cannot resell it."

So, you buy something that is supposed to Earn for you, and those earnings are not convertible into real money? That means never a Sched D? That doesn't mean there is a Sched C business, either.

Does it now occur to you that perhaps you would avoid this entirely? You haven't even addressed your question of Foreign or not.

[dbtaxsolutions]

I will try to explain better sorry for confusion.

itonewbie buys level 1 of "smart contracts" in forsage. you cannot get that money back. owning that level now gives you access to commissions when you refer someone.

you referred me under you and i buy level 1, then  itonewbie, you, immediately receives $15 of commission appearing in your digital wallet. You can cash that out anytime you want  or use it to buy level 2. 

That's how this work. 

[itonewbie]

---

@dbtaxsolutions wrote:

I will try to explain better sorry for confusion.

itonewbie buys level 1 of "smart contracts" in forsage. you cannot get that money back. owning that level now gives you access to commissions when you refer someone.

you referred me under you and i buy level 1, then  itonewbie, you, immediately receives $15 of commission appearing in your digital wallet. You can cash that out anytime you want  or use it to buy level 2. 

That's how this work. 

---

That's exactly my understanding.  And that's what a Ponzi scheme is like.

[itonewbie]

BTW, the answer to the OP's question about FBAR/FATCA reporting is here: https://proconnect.intuit.com/community/practice-advice/discussion/re-virtual-currency/01/108187

[qbteachmt]

I love this stuff; it's very entertaining  🙂  I find it helps to separate the issues.

"itonewbie buys level 1 of "smart contracts" in forsage."

That's not something that gets reported on the income tax form. It's the same as my example: I buy shares in GM or Ford. That is my new asset; that is Not a tax reported event.

"you cannot get that money back." <== not a tax reporting issue; choosing to buy a non-sellable asset is not a tax event. It's like buying a bunch of Beanie Babies "as investment" and now they are in your closet.

I actually teach this in the lesson in my class, for Asset or Expense: I buy some teddy bears in Dec to hold until Feb for Valentine's day. For that year end, my business has no expense entry, because the teddy bears are right here in my Inventory closet. I didn't Spend that money; I invested it. It is no longer Money. That value is now teddy bears. I developed "the chocolate chip cookie rule" to help them retain the difference between Expense and Depreciation. I find this helps the non-accounting students retain the concepts, by imagining teddy bears and chocolate chip cookies.

"owning that level now gives you access to commissions when you refer someone."

That's part of their Game; not part of tax reporting. "When" is always a deciding factor. "When" something happens that is reportable, you report it.

"you referred me under you and i buy level 1, then itonewbie, you, immediately receives $15 of commission appearing in your digital wallet."

The $15 is a "when" event = something has now happened that would be reportable. The reporting here is the realized income, then, based on the FMV of the $15 as income. As long as Ethereum has a convertible value, of course. Otherwise, I can give you Monopoly money, and you would not need to report that as income, since it has no FMV.

"You can cash that out anytime you want" <== Now something else happened (gain/loss)

"or use it to buy level 2" <== not a reportable event

"That's how this work"

If you cannot sell the contract, how can you try to use depreciation or depletion, then? It just is what it is when you bought it. But some day, when the whole scheme is revealed, I suppose there will be loss against the reported income from the initial investment. It seems unlikely anyone will get more than their initial investment, other than relying on ETH to increase in value.

That's how most of these virtual currency schemes work; the scheme itself is Smoke and Mirrors. You are betting on the increase of value of ETH to prove it was a good investment.

Start out thinking through each step as if it involved Real Money. You don't report those purchases on your tax form, just because you put a lot of money into the purchases.

You didn't start out with, "I convert USD to Ethereum. Now I have a wallet of Etherum to buy contract levels with." That is why I used the example of currency traders. You have many different aspects:

Currency trading for the initial conversion.

Purchase of "contracts/levels" that has an indefinite life and never wears out. That means no depreciation of any sort. You "bought In" and not "bought something."

You stated Commission as income and keep trying to explain it will be Sched C and Active. Not like Royalty (so, no depletion) and not Passive. If this was Business, but the purchase is not a reportable event, then only the income and the related business cost to generate the income would be reportable. Not the investment.

And the payment of this Income is in the form of Ethereum, so as long as it has FMV, you use that info.

And when you "sell" Ethereum, it's like any other sale of a currency or asset you have been holding at a basis. Sched D.

"you can actually call directly to SEC and they have no nay or yay about it as it is not required to be registered with SEC, it's not trading, rather it is crowd funding."

You don't get to argue both sides.

If this is not security trading as investment (making it not Sched D) and it is Crowd Funding, then Crowd Funding income is taxable as Other income on the 1040 and is not Sched C, because you are not operating a business and there are no operating expenses against this income. More than once, you stated it isn't earned, but more like a commission or reward. It's all about perspective: if the contract holder is considered the "creator" for crowd-funding purposes, then this is not for business purposes (not being raised for the business to operate), but personal.

[dbtaxsolutions]

how is buying a contract not an event? They treat this as business. It would be like owning a delivery business and you buy that Ford or GM truck you mentioned to operate. Thus making it a reportable event. 

The contract is the overhead cost in order to receive income. Without the contracts, there are no commission income. I did say you cannot sell the contracts, actually one can try, but since I was told the account is one time and the password unique to such contract is given one time and cannot be replaced. So if i sold you a contract, i would still know the password and I can regain control if/when i want to using the unique password. The contract can appreciate in value if ETH appreciate, if one bought a level 1 at 30,  and 2 years from now worth 300, but unlikely anyone would buy for the explanation i mentioned before. The smart contracts are definitely a cost of running this business.

This seems getting complicated. My head hurts, lol. 

I guess one thing must need to be established, is this a business or not? In my view, the people who owns the contracts, works a lot of hours networking and recruiting. Many are successful and have recovered the costs of contracts like 10-20 x over if not more. The platform is "to earn" Ethereum income.  Ponzi, scheme, what have you, there is intention to profit here, that by definition is business, would you say? What about the over head of internet expense, phone, laptops, etc they use to operate the business? these are business expense I would say. 

"It seems unlikely anyone will get more than their initial investment, other than relying on ETH to increase in value."

I know people (online) who has earned up to over 500k in matter of less than 6 months using this platform. Wouldn't you report that on Schedule C as commission income? That is definitely reportable. This is huge. How would you report it then if not on Schedule C. That really begs the question of it being a Business.

While many have cashed some out, between the time it was earned and the time it was sold when it appreciated in value, this even obviously triggers Sch D capital gains, some have use the commissions earned to level up. Again it is cost of running the business in order to have more opportunity for commissions. 

Thanks for discussion.

[sjrcpa]

"Level Up" is a gaming function, not a real life function. 😉

[itonewbie]

---

@dbtaxsolutions wrote:

how is buying a contract not an event?

---

From what you have told us, your client did not "buy" a contract.  Neither is the income from processing any smart contract.

There is no doubt your client is receiving income in ETH from this "system".  This income is reportable and taxable.  Fundamental to that is the nature and character of this income because that determines how that income would be subject to tax (e.g. as ordinary income or capital gain).  And this is relevant whether or not the taxpayer is in a trade or business.

For the activity to constitute a Sec. 162 ToB, apart from having a profit motive, the activity must generally be regular, continual, and substantial.  If it doesn't rise to the level of a Sec. 162 ToB, especially if the taxpayer does not have material participation, losses could then be limited by PAL.  And it's not even a trade or business, deduction for expenses may then be limited by Sec. 212.

The amount of profit one generates from an activity is not determinant of whether that activity is a ToB.  Case laws requires that facts and circumstances must be assessed, particularly in relation to the factors discussed above.  As the IRS reiterated, the same set of tax rules and principles will apply to crypto transactions.

How the other participants may report their income from this "system" and the positions they take should not be a material consideration for you or your clients, particularly since most are not tax professionals who are supposed to understand tax law and bound by Circular 230.

We can't tell you exactly what to do but we have hopefully raised enough questions for you to contemplate since you are the most familiar with your client's situation and should have (or will gather) all the necessary facts.

[dbtaxsolutions]

"How can you have Active Income from something you can never get rid of and once bought in, need do nothing to get it? They market it as Passive, but you declare it Active, but there is no business being covered. Crowd-Funding is more like a lending operation. So, which is it: business commission or funding activity?"

This remains my question.  When you say there is no business being covered, they seem to have training groups, how to network, how to on board, how to etc. They coach how to run your business. Individuals themselves call it having their own business. Those who earn by doing nothing is rare but income is largely through referral. I think this is substance over form. Active income.

[dbtaxsolutions]

Thank you

[dbtaxsolutions]

It is challenging for sure and it is new, but someone has to help these tax payers to file correctly. I am trying to do my part to assist them. I believe the foreign part was already answered for me in another post. 

Thank you for sharing your thoughts. I appreciate it. 

[itonewbie]

@dbtaxsolutions 

https://www.google.com/search?q=forsage+crowdfunding&newwindow=1&source=lnms&tbm=nws&sa=X&ved=2ahUKE...

[begbyj]

All,

I'm extremely surprised that no one here has mentioned that Forsage is not a legitimate business. It's a pyramid/Ponzi scheme with a standard element from Multi-level Marketing, namely the 'matrix'. The fact it uses smart contracts on the Etherium network is only obfuscation for the scheme. They have no business and no revenue, it's entirely generated from the profits on new 'recruits' and the price increase to Ethereum that has been common over the last year as cryptocurrencies continue to rise. 

This scheme has already received a cease and desist order from the SEC in the Philippines where most of the victims originated. 

https://www.sec.gov.ph/cdo-2020/forsage-and-forsage-philippines/

Here are some earlier articles on the topic. 

https://news.bitcoin.com/despite-warnings-from-regulators-the-ethereum-fueled-pyramid-scheme-forsage...

https://cointelegraph.com/news/one-month-on-forsage-continues-despite-secs-ponzi-warnings

I'm not sure how you list your income from a Pyramid scheme on your taxes, but it is certainly possible Schedule C would still apply. Then again, it's probably better not to have income from a Pyramid scheme instead. 

[itonewbie]

@begbyjDid we not?  You may like to read again: https://proconnect.intuit.com/community/tax-talk/discussion/re-forsage-partners-own-smart-contracts-...

[qbteachmt]

"I'm extremely surprised that no one here has mentioned that Forsage is not a legitimate business."

I think those of us that replied have taken this position.

Click on the username to see All Their Postings:

https://proconnect.intuit.com/community/user/viewprofilepage/user-id/2644

[begbyj]

I apologize, for some reason only the first dozen or so messages had loaded when I wrote this; I did not note there were a few people pointing out the obvious later on. Thank you for doing so. I was just very disheartened to see so much discussion on how to categorize the income from a fraud. 

[qbteachmt]

"I was just very disheartened to see so much discussion on how to categorize the income from a fraud."

Us, too 🙂

Especially the redundant postings; it seems to be asking for justification, but we agree that the root of the problem lies in the origination, not the end result.