Tax regulation previous to January 1, 2018 allowed you to defer capital beneficial properties taxes if you alternate one property with one other comparable property (also referred to as a Like-Kind exchange). Counting on this tax regulation and the murky crypto tax steerage that existed earlier than 2018, some cryptocurrency holders utilized like-kind alternate remedy to crypto-to-crypto trades and paid no taxes on beneficial properties. A new IRS memorandum released today reaffirms that transactions between bitcoin, ether & litecoin should not eligible for the like-kind of alternate remedy.
Like-kind Exchanges & Cryptocurrency Taxes
In 2014 and 2019, the IRS talked about that crypto-to-crypto trades are taxable.
IRS Discover 2014-21 issued in 2014 (Q-6)
Q-6: Does a taxpayer have achieve or loss upon an alternate of digital foreign money for different property?
FAQs issued in 2019 (Q16)
“Should you alternate digital foreign money held as a capital asset for different property, together with for items or for an additional digital foreign money, you’ll acknowledge a capital achieve or loss”
In the case of authority, tax regulation takes precedence over tax notices like 2014-21 and FAQs printed within the IRS web site. So, counting on extra authoritative §1031 of IRS tax code, some taxpayers utilized like-kind alternate remedy for crypto-to-crypto transactions occurred earlier than 2018. Taxpayers who took this place filed Form 8824 (Like-Sort Exchanges) to report crypto-to-crypto beneficial properties and deferred capital beneficial properties.
(The Tax Cuts and Jobs Act (TCJA) restricted like-kind alternate remedy solely to actual property efficient January 1, 2018. Due to this fact, the applicability of like-kind alternate remedy for crypto is now not a controversial matter)
IRS Chief Counsel Memorandum Issued In June 2021
The Memorandum (Number: 202124008) launched on June 18, 2021 explicitly mentions that exchanges between bitcoin, Litecoin and ether previous to January 1, 2018 are not eligible for the like-kind alternate remedy. It’s because these cash should not like-kind relating to the general design, meant use, precise use, nature and character.
It additionally says that the recommendation given right here is “restricted to the exchanges involving Bitcoin, Ether, or Litecoin. This chief counsel recommendation doesn’t tackle every other cryptocurrencies, or every other analyses not mentioned on this recommendation. Accordingly, no inferences must be made primarily based on this chief counsel recommendation that aren’t explicitly set forth on this recommendation”.
That stated, if we apply the evaluation used on this memorandum on different cryptocurrency transactions, virtually all crypto-to-crypto trades can be thought-about taxable occasions and never eligible for the like-kind alternate remedy, with none doubt. Lastly, should you utilized the like-kind alternate remedy for crypto-to-crypto trades earlier than 2018, it’s endorsed to speak to a professional tax adviser and weigh your choices.
Disclaimer: this put up is informational solely and isn’t meant as tax recommendation. For tax recommendation, please seek the advice of a tax skilled.