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because a distributive share of income
will be considered QBI and therefore be
eligible for the Sec. 199A deduction. If
guaranteed payments were received, they
would be subject to U.S. tax without the
benefit of the Sec. 199A QBI deduction.
Nonresident alien performing
services outside the United States:
Nonresident alien partners who want to
avoid U.S. tax obligations will generally
prefer foreign-source income because
the United States does not have the
jurisdiction to tax foreign-source
income of a nonresident alien. Due to
the sourcing rules discussed earlier, a
nonresident alien individual partner in
a U.S. partnership who is performing
services outside the United States would
generally prefer guaranteed payments, as
this would clearly be considered foreign-
source income and would therefore
avoid the U.S. tax regime. reasonable positions based on the legis-
If the income was instead considered Procedure & Administration lative intent. Additionally, although the
a distributive share of partnership in- IRS is not controlled by other federal
come, the source would be determined Cryptoasset clarity needed for agencies’ findings in determining the
at the partnership level, meaning that private fund managers specific treatment of cryptoassets, it may
at least some of it would likely be This item outlines the risks private fund be helpful for private fund managers to
U.S.-source ECI and therefore subject managers should consider when invest- review determinations made by the SEC
to U.S. tax (albeit eligible for the Sec. ing their portfolio in cryptoassets. and Commodity Futures Trading Com-
199A QBI deduction). mission (CFTC).
Current IRS guidance lacks
Carefully consider potential direction for investing through a Traditional private fund issues
effects private fund that require clarity
Sec. 199A has created potentially The IRS’s guidance on cryptoasset 1. Are cryptoasset trading
significant differences in the tax treat- income tax reporting standards has funds considered investment
ment between guaranteed payments been mainly directed toward individual companies under Sec. 721(b)?:
and the distributive share of partner- transactions and bitcoin-specific ac- Pursuant to Sec. 721(b), a partnership
ship income. This dynamic becomes tivities. Based on current guidance, the is treated as an investment company
even more nuanced when international IRS treats cryptoassets as property, and (as defined in Sec. 351(e)) if over 80%
IMAGE BY NAWADOLN SIRIBUTR/EYEEM/GETTY IMAGES partners would clearly prefer guaran- toassets may be considered, which limits of “readily marketable stocks or
of the value of its assets (excluding
tax provisions intersect these rules. In
the general tax principles for property
transactions apply. However, the IRS has
particular, the income-sourcing rules
cash and nonconvertible debt) is
may create situations in which certain
held for investment and consists
not clarified the type of property cryp-
securities.” “Readily marketable stocks
the application of specific Code sections
teed payments while others would pre-
fer a distributive share of partnership
that private fund managers generally
or securities” is narrowly defined to
rely upon.
income. Because of this, partnerships
include a number of assets (but not
As cryptoassets evolve, resulting in
should carefully examine the potential
the general term “property”) that are
effects on all partners before restructur-
traded on a securities exchange or
more complex transactions, the lack of
traded or quoted regularly in the over-
ing current agreements.
guidance for private fund managers has
From Raymond M. Polantz, CPA,
MT, Cleveland
guidance from the IRS, there may be
als attempt to mitigate through taking
August 2022 21
www.thetaxadviser.com left a void that tax planning profession- the-counter market. Without further