Cryptocurrencies Are Highly Volatile, but Some Say They Are Worth It

For some investors—those with stomachs for volatility—it may be time for a closer look at cryptocurrencies.

By now, most investors have heard of bitcoin, following its phenomenal growth last year. Bitcoin, an electronic currency made by computers creating series of unique numbers through complex math problems, is sold on unregulated exchanges and accepted by a growing number of individuals and businesses because of the speed and low cost of transactions.

One bitcoin was valued at virtually nothing in the early days and now costs around $437, as of Sept. 18. Other crypto coins tend to have less value, but cryptocurrencies in general are drawing increasing interest as potential investments.

CoinDesk, an online publication that tracks digital currencies, estimates by the end of this year there will be eight million bitcoin trading accounts, known as “wallets,” and 100,000 companies that accept bitcoin.

There have been notorious security breaches, including the loss of half a billion dollars worth of bitcoin at Mt. Gox, formerly the largest bitcoin exchange, which filed for bankruptcy protection. But supporters say it’s a misunderstanding to see such cases as a weakness in cryptocurrencies. Campbell R. Harvey, a professor of finance at Duke University in Durham, N.C., says the Mt. Gox loss exposed a lack of security at the exchange itself. “Blaming bitcoin for the Mt. Gox bankruptcy is like blaming the U.S. dollar for the downfall of Lehman Brothers,” he says.

John Normand, head of foreign exchange and international rates strategy at J.P. Morgan Chase & Co. in London, called bitcoin “vastly inferior” to traditional currency in a report earlier this year. “Bitcoin is currency with high return potential but also high volatility and low liquidity,” he said in an interview, advising institutional investors to steer clear. Individuals, however, should decide for themselves, he added, whether the return prospects “justify its illiquidity and volatility,”

Here’s what potential investors should know about cryptocurrencies.

Some Bitcoin Basics

Unlike dollars or any other traditional currencies, bitcoins aren’t printed or backed by a central government. They are created by individuals and businesses using high-powered computers. Creators of bitcoin are allowed to keep some of what they create as payment for the service. The rest is sold on unregulated exchanges.

When you buy a bitcoin, what you get is two strings of numbers called a public key and a private key. For encryption and convenience purposes, the numbers are often expressed as letters and digits. The public key is the number a person must know in order to send you bitcoin. The private key is the number that only you are supposed to know. By “signing” a transaction with your private key, you authorize the movement of all or some of the bitcoin from your virtual wallet into another.

All such bitcoin movements are instantly published in a ledger so that anyone can keep track of the overall money supply. The ledger floats on some version of the Internet cloud as a collaborative document rather than a centrally managed account. Users have adopted this mechanism for shopping, transferring money and speculation.

For users, the perceived value of a cryptocurrency is perhaps best understood as the price of a tool in limited supply. Demand is fueled by parties interested in peer-to-peer forms of payment that don’t involve banks and other intermediaries, making such payments cheaper and faster.

For investors, meanwhile, a cryptocurrency becomes attractive the more popular it proves to be among users. Say bitcoin becomes the most popular way for Filipinos working in the U.S. to send money home. The increase in demand for the relatively scarce strings of numbers will drive up bitcoin’s value, analysts say.

On the other hand, if one cryptocurrency supplants another, or if peer-to-peer finance proves to be a flash in the pan, then a bitcoin will be just another meaningless string of alphanumeric code floating around on the Internet.

Some have argued the opportunity for individual investors in cryptocurrencies has passed, since large hardware is now available for large investors to purchase and mine coins on a much faster, larger scale. “It has become less of a hobby and more of a business for people requiring constant investment and careful attention to margins and costs,” says Hansel Dunlop, a London-based developer and early acquirer of bitcoin.

Other currencies have developed out of the bitcoin technology and have added improvements on that platform, explains Mr. Dunlop. The differences are nuanced, he says.

For example, Litecoin, the second-largest cryptocurrency in terms of market capitalization, offers a more complex problem to solve and is therefore more difficult to “mine,” or create. Others, like Ripple, are not minable but can be acquired at cryptocurrency exchanges.

To Some, Companies Are Key

Investors don’t have to mine coins or speculate on the exchanges to make money in cryptocurrencies. Some observers recommend investing in companies that use or service cryptocurrency and other peer-to-peer payment forms.

These include companies that process payments, including Colored Coins or Ripple Labs Inc., with open-source protocols that allow users to trade anything of value instantly online for virtually no cost. These firms are in the early stages of development and so, by and large, are not publicly traded.

James Rickards, a financier and author, says he sees potential in technologies that process faster, cheaper and more transparent exchanges that go beyond trading money. Companies using these new technologies, he says, “allow consumers to buy products or to send payments in seconds at a fraction of the cost” of regular currency.

Jeffrey Robinson, author of a critical book about bitcoin, also says investors should be looking at these kinds of companies rather than cryptocurrencies themselves. Says Mr. Robinson, “This is not a commodity buy, but it’s a technology buy.”

Chris Larsen, chief executive of Ripple Labs, says cryptocurrencies are just the start of a wider technological revolution. Mr. Larsen says he envisages the Ripple protocol being used to exchange anything of value—from currencies to airline miles—instantly at a fraction of current fees.

Remember the Risks

Despite the excitement, keep in mind the risks. Cryptocurrency can be highly volatile and illiquid, says Duke University’s Mr. Harvey. The relatively limited market capitalization of bitcoin means it may be difficult to sell in large amounts without seeing a negative impact on the price, he says. Bitcoin’s market cap recently was about $6 billion.

“Bitcoin was never meant to be a speculative investment vehicle,” he adds. “Bitcoin’s main purpose is to enable the efficient exchange of property via minimal transaction costs and a high level of security.”


By: Javier Espinoza



“At any rate, the spook spoke the truth: cryptology represents the future of privacy, and more. By implication cryptology also represents the future of money, and the future of banking and finance. (By “money” I mean the medium of exchange, the institutional mechanisms for making transactions, whether by cash, check, debit card or other electronic transfer.) Given the choice between intersecting with a monetary system that leaves a detailed electronic trail of all one’s financial activities, and a parallel system that ensures anonymity and privacy, people will opt for the latter. Moreover, they will demand the latter, because the current monetary system is being turned into the principal instrument of surveillance and control by tyrannical elements in Western governments.” – J. Orlin Grabbe

Category : News & Events | Technology

The Key: Adjusting Lifestyle to Reduced Income


And now for a little good news.

Most of the stories we read about retirement planning tend to be dominated by “unpleasant realities” and savings goals that can seem like Mount Everest. And then … the brakes go out on the car again.

Indeed, many people head into retirement with little money and little planning. And life has a way of throwing financial or health-related curve balls even when we have planned ahead or think everything is under control.

But the reality is that most people simply find a way to adjust.

Roger Burdette, a married 67-year-old living in Great Falls, Va., is a retiree who didn’t let planning go by the wayside. In his mid-50s, he started tracking how much he would need to live the lifestyle he wanted once he could walk away from the office.

But his investments took a beating during the financial crisis and have been slow to recover. When he retired a year ago from a job as a computer-systems engineer, he realized that if he wants to make his savings last, he needs to live on a tighter budget than he had hoped.

“You think back to when you go to college and you don’t have a lot of money, so you’ve got to find ways to make it go farther,” he says. “It’s the same approach for retirement.”

Mr. Burdette’s views found their way into a recent sampling of retirees published by T. Rowe Price Group, the mutual-fund company. The survey focused on individuals who had stopped working in the past one to five years and who had a 401(k) plan or an individual retirement account that had been rolled over from a 401(k).

Fewer than one in five said their postretirement income matched their pre-retirement paycheck. Instead, on average, their retirement income was just 66% of what they had been making. “There’s a focus on whether you should target 80% or 85% of your pre-retirement income,” says Anne Coveney, a vice president at T. Rowe Price. But she says it was a “reality check” to see 52% of respondents say they were getting only 41% to 80% of pre-retirement income.

Along the way, 40% said they have discovered that they can adjust their lifestyle to match their income by a “great deal,” and 37% agreed that the same term applied to the statement: “I don’t need to spend as much as I did before I retired to be satisfied.”

David Hartness, chief client officer at Iron Gate Partners in Wilmington, N.C., says that when clients have to make adjustments, he urges them to consider a big-picture question: “Take a step back and ask, ‘What are the most important things in this new season of life?’

Usually, the biggest drain on retirement budgets is housing. Mr. Hartness suggests to some clients that they look beyond just selling a big house and buying a smaller one, and consider renting.

“There are a lot of places where you can rent and have full amenities like a country club,” he says, without having to be responsible for the upkeep of a house.

He also has found that many clients can drop the hefty bills that come with golf-club memberships and still get in plenty of tee time. He tells of one client who dropped her membership and has ended up playing more golf since, as friends have invited her to join them.

In the background, current retirees don’t have to be as reliant on their savings as will likely be the case in years to come. Vanguard Group released a similar survey of retirees with investment accounts this year and found that 20% of household incomes in its sample were coming from pensions and 28% from Social Security.

“Everyone is talking about the new retirement,” where retirees have to fund their lifestyles out of savings, “but it’s not here yet,” says Steve Utkus, director of Vanguard’s Center for Retirement Research.

Mr. Burdette uses Social Security income as the base for his budgeting and has tried to adjust his fixed expenses down to match what he gets from the government.

Downsizing to a small house is central to his revised plan. “We’re going to have to live a little more modestly,” Mr. Burdette says.

He’s also looking at holding on to his current car longer than might have otherwise been the case.

But all told, Mr. Burdette counts himself as satisfied in retirement, having turned a hobby of numismatic research into an area to which he can devote more time.

In the T. Rowe Price survey, some 90% of respondents said they are “very satisfied” or “somewhat satisfied” with their retirement. Of course, many people do struggle, especially when retirement is forced on them earlier than expected for health reasons. And the T. Rowe Price survey found that unmarried women among respondents tended to have a harder time making ends meet.

But for the most part, says Ms. Coveney, “retirees are making it work and being flexible with their spending in the early years of their retirement.”

By: Rob Shepperson

Category : Pension Admin & Consulting

Leaving Behind too Big of an Estate Can Cause Tax Pain Later

When it comes to retirement planning, most people are focused on making sure they don’t outlive their assets. While that is key, there is a serious risk that many people overlook: leaving too much money on the table when they die. That can result in their children and grandchildren paying a premium in estate taxes.

While the federal estate-tax exemption has increased to $5.34 million, individual states have much lower limits for state taxes. In New Jersey, for example, an individual can pass down only $675,000 tax-free. Someone with an estate of $2 million would have about $1.3 million subject to a 16% state tax. However, New Jersey doesn’t have a gift tax, so if that person gave away the $1.3 million while still alive, and didn’t die within three years of making the gift, the money wouldn’t be taxed.

How do you know you have enough money to give some of it away while you’re alive?

In my practice, we do a conservative retirement projection for clients using worst-case scenarios. What happens if inflation is 2% higher than it is now? What happens if the client spends $13,000 a month instead of $10,000? Running multiple projections can help clients frame their spending within a range, so that they can feel better about spending more and still never running out.

Then we address the client’s inevitable fear of a stock-market crash. We set aside five years of their cash needs in liquid accounts such as short-term CDs and bonds, so that whatever happens, they’ll be fine.

Finally, we address what risks the client may have besides a market correction. We’ve found, for example, that many new clients are underinsured from a liability point of view.

After all of that, some people still have concerns. In those cases, we try to get them to recognize that in addition to tax benefits, there are emotional benefits that come with making gifts while they are still alive.


By: Howard Hook


Category : Estate & Trust

As an employer, if you offer any type health and welfare benefit and you have more than 100 employees receiving those benefits, you may be required to file Form 5500, the Annual Return/Report of Employee Benefit Plans with the Department of Labor (DOL)/ Internal Revenue Service (IRS)


A couple of examples of health and welfare benefits would include health insurance and group term life insurance, but there are many other employee benefits that require annual reporting on Form 5500.


This is a good time to review all the employee benefits you offer your employees and determine which benefits require reporting and whether or not the Form 5500 is timely filed because the DOL now has EFAST2, the mandatory electronic filing system. EFAST2 can identify any large employers that file returns for their retirement plans (401(k)) and whether or not any health and welfare benefit plans are being filed also.


The DOL is simply sending letters of inquiry to those identified companies and if there is either no response or the response is questionable an examination is automatically opened.


If you have failed to file accurate or complete Forms 5500(s) timely, in addition to the assessment of severe penalties, the penalty relief available through the Delinquent Filer Voluntary Compliance Program (DFVCP) is closed to you.


The DOL can penalize you up to $1,100 per day for failure to file Form 5500 for health and welfare benefit programs.


The DFVCP is available to plan administrators who have not been notified in writing by the DOL of a failure to file a timely annual report. Participation in the DFVCP is a 2 part process. First, the Form 5500(s) is electronically filed and secondly the penalty payment is remitted using the DOL calculator. The penalty structure can be calculated daily at $10 day; by a “per filing” method with a maximum of $2,000 for large plans or by a “per plan” method with a maximum of $4,000 regardless of the number of late reports filed at the same time.


The JMF Pension team is available to consult with you about the filing requirements; ERISA benefits that are subject to reporting and/or preparation of any Form 5500s not previously timely filed.

Category : News & Events

Officials Say the Actual IRS Will Never Make First Contact by Phone

Con artists posing as Internal Revenue Service agents are back in the news. Despite previous warnings from government officials, some taxpayers still haven’t gotten the message.

“There are clear warning signs about these scams, which continue at high levels throughout the nation,” IRS Commissioner John Koskinen said recently. “Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment.”

“This is not how we operate,” he said. “People should hang up immediately” and contact the Treasury Inspector General for Tax Administration (www.tigta. gov) or the IRS. On the TIGTA site, click on “IRS Impersonation Scam Reporting.”

Government officials have received about 90,000 complaints through a telephone hotline since late 2013, says a TIGTA spokesman. About 1,100 victims have lost an estimated $5 million from these scams.

Scamsters may try to claim that you owe money or are entitled to a big refund, officials say. Callers might use phony names and IRS badge numbers. They might even know the last four digits of your Social Security number.

Real IRS representatives “never” ask for credit-card, debit-card or prepaid card information over the phone, the IRS said. They also never insist that you use a specific payment method. And they never demand immediate payment over the phone, the IRS says.

If you get a suspicious call and think you owe taxes, hang up and call the IRS (800-829- 1040). If you have no reason to think you owe anything, call TIGTA (800-366-4484), and tell the Federal Trade Commission using its “FTC Complaint Assistant” (ftc.gov). Include the words “IRS Telephone Scam.”

By: Tom Herman

Category : Corporate & Partnership Tax | Individual Tax | News & Events

By Jim Stinson | jstinson@al.comAL.com
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on August 20, 2014 at 5:21 PM, updated August 20, 2014 at 5:57 PM

Julie Magee, Alabama revenue commissioner


MONTGOMERY, Alabama — The state of Alabama slowed about 100,000 tax refunds this year because of a new computer algorithm designed to detect fraud and identity theft.

That meant some tax refunds have gone longer than normal in getting returned to Alabama taxpayers, and will be paid with 3 percent interest, as required by law.

“If ID theft was not such a problem, we wouldn’t have to do this,” said Julie Magee, state revenue commissioner. “The criminals have just gotten greedier.”

Magee said she would rather pay interest to taxpayers for delayed refunds than make payments to ID thieves, who can be people who live in other nations. She said in the past, ID thieves would target federal income-tax refunds, but they have expanded operations to state refunds.

The ID thieves are old foes in the credit-card industry, but they have stepped up their efforts to steal state refunds across the nation.

Magee said that the Alabama Department of Revenue, in response to fraud, installed a new computer program to watch for fraud clues. It slowed down as many as 100,000 personal income-tax tax refunds this year, Magee said, using a variety of “filters.”

“If ID theft was not such a problem, we wouldn’t have to do this. The criminals have just gotten greedier.”

“We probably put too many (filters) in place this year, to be honest,” said Magee. Magee apologized to the taxpayers but stressed again that the state is trying to safeguard their refunds.

A complicating factor for the state was the fact that the federal government began processing its federal returns three weeks later than normal, beginning some time in February. That slowed down Alabama’s system too, Magee said.

As of Wednesday, the state still owes $19,867,000 in refunds. Magee said 13,716 individual returns are left to process. That’s far fewer than 1 percent of all returns filed this year.

In total so far, according to the Alabama Department of Revenue website, 1.85 million returns have been processed, and 1,063,768 refunds have been issued.

Magee said next year’s program will more narrowly focus on questionable returns, and raise fewer red flags, while still rooting out fraudulent returns.

Federal refund status can be checked here.

This story will be updated.

Category : News & Events

A new Alabama income tax credit is available for Alabama individuals and businesses that contribute cash to the Alabama Department of Postsecondary Education (ADPE) for qualifying educational expenses directly associated with the state’s Career‐Technical Dual Enrollment Program. The tax credit was created by House Bill 384 (Act No. 2014‐147, the “Act”), which was sponsored by Representatives Buttram, Baker, Collins, and Hubbard. The Bill was signed into law by Governor Robert Bentley on March 11, 2014, and will go into effect for tax years beginning on or after January 1, 2015.

We have had a lot of questions about the particulars about implementing and complying with the law, so we created a handy guide (linked below).

JMF Memo Explaining the Alabama Dual Enrollment Tax Credit

If you have any questions, please feel free to contact any of our CPAs for further explanation.

Category : Corporate & Partnership Tax | Individual Tax | Manufacturing | News & Events

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