I tried reading the instructions but that's actually what confused me more! They use so many technical terms that reference other technical terms. I felt like I was going in circles. Do you have any suggestions for making sense of all the cross-references in the instructions?

I totally get that feeling! The cross-references can make you feel like you're chasing your tail through an endless maze of tax jargon. What helped me was starting with the glossary section in Publication 17 (the main IRS tax guide) to understand the basic terminology first before diving into specific form instructions. Another approach that helped me was focusing only on the sections relevant to my specific situation and ignoring everything else. For distribution codes, the 1099-R instructions have a table that explains each code - print just that page and highlight only your specific code to avoid getting overwhelmed by all the other possibilities.

This is actually good advice. I was confused about a distribution code on my 1099-R last year and the plan administrator explained everything clearly. They even emailed me a breakdown of the calculation that I could reference when filing.

Would investing in growth stocks that don't pay dividends help reduce the NIIT? Since they don't generate current income until you sell?

Yes, that's a good strategy. Growth stocks that don't pay dividends won't generate current investment income subject to NIIT. You'll only potentially face NIIT when you sell and realize capital gains. Investments that generate unrealized appreciation rather than current income can be an effective way to defer the NIIT. Just remember that the eventual sale will potentially trigger both capital gains tax and NIIT if your income is above the threshold in the year you sell.

Yes, distributions from retirement accounts like 401ks and traditional IRAs count toward your MAGI, which is used to determine if you're over the threshold. They're not considered investment income subject to NIIT themselves, but they can push your other investment income into NIIT territory by raising your MAGI.

Do you think it's better to just wait until next year at this point? I'm in the same boat as OP but worried I'm causing more problems than I'm solving by trying to do this mid-year. Would it be simpler to just stay as a sole prop for 2024 and start fresh with an S-corp in January?

That really depends on your specific numbers. If you're making substantial income where the self-employment tax savings would outweigh the hassle and potential accounting costs, it might still be worth pursuing for 2024. In my experience, establishing the S-corp now and getting your systems in place (payroll, accounting separation, etc.) can be advantageous even if the tax savings are minimal for the partial year. It gives you time to work out any kinks in your process before starting a full tax year. Plus, the longer you wait, the harder it can be to get retroactive approval since "I didn't know" becomes less convincing as a reasonable cause the longer you've been in business.

Thanks for sharing your experience! That's reassuring to hear they were understanding in your case. Did you have to go back and adjust your bookkeeping for those earlier months once the election was approved? I'm wondering how complex that retroactive accounting might be.

Yes, I did have to go back and retroactively clean up my books once the election was approved. I had to reclassify some transactions and establish a clear division between business expenses, my reasonable compensation, and owner distributions. The most time-consuming part was setting up payroll retroactively and making sure I was compliant with all the payroll tax requirements. I ended up establishing what my reasonable salary should be for the full year, then calculating what I should have been paying myself each month. My accountant helped me file the necessary quarterly payroll tax forms for the quarters that had already passed. It was definitely a headache, but the tax savings made it worthwhile in my case.

Is it safe to keep a document with your SSN saved on your computer though? I'm always paranoid about identity theft, especially with documents that have my full SSN written out.

That's a really good point about security. What I actually do is keep a mostly completed version with just the last four digits of my SSN visible, then I add the full number only when I'm ready to send it. For extra protection, I save the template as a password-protected PDF, so even if someone somehow got access to my computer, they couldn't open the file. And I never email a W-9 as an unsecured attachment - I either use a secure document sharing service or password-protect the PDF and send the password through a different channel like text.

Companies often request updated W-9s annually as a best practice, especially if it's been a while since they collected one from you. It helps them ensure they have your current information.

Thanks for breaking it down like this - now I get why the numbers look so crazy. But how do I actually fix it in H&R Block? When I look at the forms it's just showing these huge numbers and I can't figure out where to adjust the cost basis.

In H&R Block, you should be able to go to the cryptocurrency section and view the detailed transactions. Look for a section called "Review and Edit Transactions" or something similar. For each transaction, make sure it has both a "cost basis" (what you paid) and "proceeds" (what you received when selling). If cost basis information is missing, H&R Block might be treating the entire sale as profit. You'll need to manually enter the cost basis for any transactions where it's missing. It's tedious but necessary to avoid overpaying. Alternatively, you might consider using specialized crypto tax software to generate the correct forms, then import those into H&R Block instead of using their direct Coinbase import.

This is important! Coinbase switched from 1099-K to 1099-B a couple years ago, but some users still get confused by this. The 1099-B should include your cost basis, but sometimes the data is incomplete. Always check if any transactions are marked "cost basis not reported to the IRS" because you'll need to provide that info manually.