Like-kind exchange treatment of altcoins

One of my specialties is the taxation of Bitcoin and other cryptocurrencies, which I’ve been writing about extensively Tyson Cross. Deferred capital gains tax Ask Question. I don’t have a citation for this, but I believe the IRS has already answered this question. This does not affect or other previous years, although it might influence the IRS’s decision to contest the use of Section in those years. They amble through the magical Land of Oz, following the yellow gold brick road, guided by a motley, sometimes bizarre, cast of characters, often oblivious to the dangers and realities of the world in which they live.

Trades between different cryptocurrencies might qualify as like-kind exchanges under Section of The tax season is officially underway, like-kind exchange treatment of altcoins one of the hottest topics among cryptocurrency investors is the possible application of Section to defer capital gains on crypto-to-crypto trades. As a tax attorney specializing in cryptocurrency, this is undoubtedly one of the most common questions I’m asked. Unfortunately, there’s more misinformation than truth going around on the topic of like-kind exchanges. Many cryptocurrency investors have some grave misunderstandings about the benefits and downsides of treating their crypto-to-crypto trades as like-kind exchanges under Section Truth 1: It’s possible for cryptocurrency to qualify as «like-kind property». In order for crypto-to-crypto trades to qualify as like-kind exchanges under Sectionthe cryptocurrency involved in the trade must be «like-kind property.

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The provision was originally envisioned as a break for farmers swapping livestock, but came to be used for trades in commercial real estate, art and airplanes — and cryptocurrencies. According to three attorneys contacted by Investopedia, at least some cryptocurrency investors regard a sale of bitcoin for ether , for example, to be a like-kind exchange that is exempt from capital gains taxes. Under the new law, he continues, «it’s clear now that you can’t do that. Investors considering taking advantage of this break for the tax year should weigh the risks. A second change to the tax code affects businesses in the cryptocurrency space, such as those raising money by issuing tokens through initial coin offerings ICOs or a similar fundraising method known as a SAFT.

Trades between different cryptocurrencies might qualify as like-kind exchanges under Section of The tax season is officially underway, and one of the hottest topics among cryptocurrency investors is the possible application of Section to defer capital gains on crypto-to-crypto trades. As a tax attorney specializing in cryptocurrency, this is undoubtedly one of the most common questions I’m asked. Unfortunately, there’s more misinformation than truth going around on the topic of like-kind exchanges.

Many cryptocurrency investors have some grave misunderstandings about the benefits and downsides of treating their crypto-to-crypto trades as like-kind exchanges under Section Truth 1: It’s possible for cryptocurrency to qualify as «like-kind property». In order for crypto-to-crypto trades to qualify as like-kind exchanges under Sectionthe cryptocurrency involved in the trade must be «like-kind property.

The comparison echange be directed to ascertaining whether the excjange, in making the exchange, has used his property to acquire a new kind of asset or has merely exchanged it for an asset of like nature or character. Commissioner, 71 T. The «nature or character» standard is a highly factual and nuanced test. There are hundreds of regulations, revenue rulings, and US Tax Court cases applying the test to other kinds treament property, but unfortunately none are directly relevant to cryptocurrency.

Examples include the exchange of gold bullion coins, FCC broadcast licenses, and even parking spaces. Altcins not directly relevant, some of these authorities nonetheless tend to support the classification of cryptocurrency as like kind property. Most convincing in my opinion are the authorities that focus on the nature of the taxpayer’s investment and whether the taxpayer’s economic position has changed as a result of the exchange.

A strong argument can be made that exchanging different cryptocurrencies is merely a change in grade or quality of the taxpayer’s investment, and that the nature and character of the investment remains the. Ultimately, there’s no right or wrong answer until we get further guidance from the IRS or the issue is litigated in court. One of the most common misconceptions I encounter when consulting with new or potential clients is the belief that treating crypto-to-crypto trades as like-kind exchanges eliminates the altvoins to track and report such ov on their tax returns.

Unfortunately, this is not true. Even though like-kind exchanges are «tax free,» every single trade must still be reported to the IRS. Like-kind exchanges are reported using Form Software like bitcoin. First, as discussed exchsnge, the absence of direct authority on the issue like-kind exchange treatment of altcoins the Likek-ind is free to reach its own conclusions about exchnage qualification of crypto-to-crypto trades as like-kind exchanges.

That’s just 0. With that said, we have no way to know if the IRS will ultimately take a stance on the use of Section The IRS has limited resources and so far has not shown much commitment to spending those resources on cryptocurrency related issues. However, there are no guarantees and no way to confidently predict what position the IRS will ultimately take, if any.

If the IRS decides to reject the use of Section for crypto-to-crypto trades, affected taxpayers would be on the hook for additional taxes and. There’s also the possibility that the IRS will choose to assess an accuracy related penalty against such taxpayers for negligence or «substantial understatement of tax.

Taxpayers may avoid the accuracy related penalty if they have sufficient legal authority for treating crypto-to-crypto trades as tratment exchanges. What is sufficient legal authority? It depends on whether the taxpayer discloses to the IRS that they treated all of their crypto-to-crypto trades as like-kind exchanges. This disclosure would be altcolns by filing Form — Disclosure Statement with their tax return. By including the disclosure statement and thereby notifying the IRS of the use of Sectionthe taxpayer ezchange be excused from any accuracy related penalties as long as the taxpayer had a «reasonable basis» for the position.

Taxpayers who don’t file the disclosure statement will tfeatment to have «substantial authority» in order to avoid any penalties. According to IRS a,tcoins, «substantial authority «exists if the weight of authorities in support of a position is substantial in relation to the weight of the authorities against the position.

When evaluating the risk of using Section for deferring gains on crypto-to-crypto trades, taxpayers should keep in mind the amount of time exchqnge IRS has to reject the use of Section and assess additional tax. Generally, the IRS only has three years to assess additional tax after a tax return is filed. Unfortunately, treating crypto-to-crypto trades as like-kind exchanges might cause such an omission of income.

In such a like-kind exchange treatment of altcoins, the IRS would have six years from when the tax return was filed to reject the use of Section and assess additional taxes, interest, and penalties. As part of the Tax Cuts and Jobs Act passed at sxchange end ofSection was amended to make like-kind exchanges only applicable to real estate transactions. Thus, crypto-to-crypto trades are permanently foreclosed from like-treatment beginning January 1, All future crypto-to-crypto trades will have to be treated as taxable events and reported accordingly.

This does not affect or other previous years, although it might influence the IRS’s decision to contest the use of Section in those years. At the end of the day, crypto-to-crypto trades may qualify as like-kind exchanges, but such qualification is far from certain.

Although I believe there’s sufficient legal authority to treat such trades as like-kind exchanges, such authority does not guarantee excuange IRS will accept the use of Section for crypto-to-crypto trades. In such a case, the taxpayer would have to either accept the IRS’s conflicting interpretation or litigate the matter in court.

According to IRS data, justtax returns included Form inthe most recent year for which such data is available. I’m a tax attorney and founder of Cross Law Group. One of my specialties is the taxation of Bitcoin and other cryptocurrencies, which I’ve been writing about extensively I write about the tax treatment ecchange Bitcoin and other cryptocurrencies.

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Crypto Taxes EXPLAINED! Bitcoin/Altcoins, Like-Kind Exchanges, Examples! (U.S. Specific Dec. 2017)

They had to call it property, and it had to inherit like-kind tax treatment because of it barring any specific disqualification that doesn’t currently lik-ekind. Taxpayers who choose to report their coin-for-coin exchanges as like-kind exchanges should be mindful of their record-keeping and reporting obligations. So you could use like-kind exchange treatment of altcoins justification like this: I hold Bitcoin to be like-kind to Litecoin, because altxoins use the same fundamental technology with just a tweak in the math, as if exchanging different grades of excange bars, which has been approved by tax court ruling xxxxx. Share to facebook Share to twitter Share to linkedin. Just a thought because this is a really good question: Would the buying and selling of blockchain based digital currency, using other blockchain based digital currencies, be subject to like kind treatment and exempt from capital gains until exchanged for a non-blockchain based good or service or national currency Suppose someone sells 1 bitcoin to buy monero. The person gets their bitcoin back and has But, the application of the like-kind exchange rules to crypto transactions is far from certain. All future crypto-to-crypto traetment will have to be treated as taxable events and reported accordingly. Both properties must be similar enough to qualify as «like-kind. In reading the IRS on bitcoin, they only care about the US dollar value of bitcoin or monero and in this example, the US dollar value is. Which in some cases is privy to like-kind treatment where capital gains tax events are no longer created upon liquidation treatkent another like property until settled in a national currency. Most convincing in my opinion like-ind the authorities that focus on the nature of the taxpayer’s investment and whether the taxpayer’s economic altckins has changed as a result of the exchange. Must be for investment or business purposes Must not be trade inventory Must be very, very similar The IRS has not issued formal guidance in the matter. Taxpayers may avoid the accuracy related penalty if they have sufficient legal authority for treating crypto-to-crypto trades as like-kind exchanges.