On June 18, 2021, the Inside Income Service (the IRS) Workplace of Chief Counsel launched Memorandum 202124008 addressing the appliance of Inside Income Code (Code) Part 1031 to exchanges of sure cryptocurrencies that occurred previous to the Tax Cuts and Jobs Act (TCJA). The TCJA, P.L. 115-97, amended Part 1031 of the Code to offer that like-kind trade remedy applies solely to actual property. The memorandum addressed the next query: If accomplished previous to January 1, 2018, does an trade of (i) bitcoin for ether, (ii) bitcoin for litecoin, or (iii) ether for litecoin (every a Described Trade) qualify as a like-kind trade underneath Part 1031 of the Code? The IRS concluded that every Described Trade did not qualify as a like-kind trade underneath Part 1031 of the Code.
The IRS referenced Discover 2014-21 treating digital forex as property for federal earnings tax functions and thus topic to common tax rules relevant to property transactions. Citing Rev. Rul. 2019-24, the IRS famous that digital currencies akin to Bitcoin, Ether, and Litecoin are cryptocurrencies as a result of they depend upon cryptography to safe transactions which might be digitally recorded on a distributed ledger. The IRS highlighted the traits and performance of every cryptocurrency, specializing in (a) general design, (b) supposed use, and (c) precise use in analyzing every Described Trade.
Notably, along with cryptocurrencies getting used as a way of cost, the IRS acknowledged that taxpayers make investments in a wide range of cryptocurrencies and a few cryptocurrencies could also be exchanged for fiat currencies, whereas others could solely be exchanged for sure varieties of cryptocurrencies.
Whereas taxpayers can not depend on the memorandum, it’s nonetheless useful for events who take the place that their publicity to cryptocurrencies is unrelated to any commerce or enterprise and solely pertains to funding actions.
In resolving the query as as to whether Part 1031 of the Code applies to every Described Trade occurring previous to January 1, 2018, the IRS defined that Part 1031(a)(1), which supplies that “[n]o acquire or loss shall be acknowledged on the trade of property held for productive use in a commerce or enterprise or for funding if such property is exchanged solely for property of like-kind which is to be held both for productive use in a commerce or enterprise or for funding,” applies solely to a transaction the place the taxpayer’s financial scenario is basically the identical because the taxpayer’s financial scenario previous to the transaction. Treas. Reg. § 1.1031(a)-1(b) defines “like form” for functions of Part 1031(a) of the Code as “the character or character of the property and never the grade or high quality. One form or class of property could not, underneath that part, be exchanged for property of a special form or class.” The IRS cited Rev. Rul. 82-166 the place the trade of gold bullion for silver bullion resulted in acquire recognition partly as a result of the latter was used primarily as a commodity and the previous was used primarily as an funding. The IRS additionally cited Rev. Rul. 79-143 the place the trade of gold cash for gold cash was thought-about taxable as a result of one sort of gold coin was valued for its collectability and the opposite was valued for its metallic content material. Whereas taxpayers can not depend on the memorandum, it’s useful that the IRS has used these rulings on commodities to help it within the interpretation of Part 1031 of the Code, notably for taxpayers counting on current commodity determinations in respect of different provisions of the Code.
The IRS in contrast Bitcoin and Ether to Litecoin, concluding that Bitcoin and Ether had a basically completely different position within the broader cryptocurrency market from 2016 to 2017, highlighting that “Bitcoin and Ether acted as an on and off-ramp for investments and transactions in different cryptocurrencies” as a result of as a way to spend money on cryptocurrency or liquidate an funding, an investor would have wanted to amass both bitcoin or ether first. In distinction, the IRS famous that litecoin was considerably extra restricted when it got here to buying and selling. Because of that distinction, the IRS concluded that neither the trade of bitcoin for litecoin or ether for litecoin certified for like-kind trade remedy because of the differing nature and character of the cryptocurrencies concerned. Taxpayers ought to observe that given the assorted makes use of or capabilities that cryptocurrencies can serve, other than a attainable funding, a important evaluation of all the last word info and circumstances is critical. The usage of a cryptocurrency, for instance, to carry out a service-like operate might be seen as a commerce or enterprise that’s past mere funding.
In respect of the trade of bitcoin for ether, although the IRS acknowledged that each had an identical position within the cryptocurrency market and had comparable qualities and makes use of, the IRS famous that Bitcoin “is designed to behave as a cost community for which Bitcoin acts because the unit of cost” whereas Ether was supposed to behave not solely as a cost community however “as a platform for working good contracts and different purposes.” Thus, the completely different functionalities of bitcoin and ether led the IRS to conclude that the trade of 1 for the opposite wouldn’t qualify as like-kind property underneath Part 1031 of the Code.
The memorandum addressed solely exchanges of bitcoin for ether, bitcoin for litecoin, and ether for litecoin.