Can you defer taxes by trading one crypto for another crypto under the IRS Section 1031 like-kind exchange rules? I want to break this down a bit since there are some people in the crypto community that think they may be able to get around reporting gains on trades from one crypto to another without receiving cash or fiat in return. First off in my opinion I do not see anything in the 1031 rules that specifies crypto. You can defer taxes on real estate under a 1031 exchange but the code specifically excludes items such as stocks/securities and precious metals. If you take the position that stock is property and not included in the definition of stocks/securities or precious metals your making the assumption that the IRS did not intend to include cryptos. It’s hard to take that stance given that crypto didn’t exist at the time those rules were written. Even if you argue that crypto is not considered stock or a security and doesn’t fall under the precious metal category you still have to pass the hurdles to qualify for deferment under section 1031. One of those hurdles is the requirement to specifically identify what property you are exchanging into. For example when you enter into a 1031 exchange for a real estate transaction you must identify the specific property you are exchanging into. In the case of crypto I don’t know how you would interpret that rule. Could you identify the crypto if you say you are exchanging bitcoin for Ethereum? Or would you need to interpret the rule differently where you would need to identify the specific cryptos your exchanging for. For example if you sold 20 bitcoin on an exchange for Ethereum typically you end up with fractions of Ethereum from 100’s of different individuals who are anonymous. Would you need to identify those 100 coins for those 100 individuals to satisfy the requirement under section 1031 to identify the asset your exchanging into? To make the parallel argument for real estate would mean saying you could exchange your home for any home or multiple homes without identifying the location/address of the homes your exchanging into, which I don’t think would fly under section 1031. Even if you get past all of these hurdles we still don’t know how the IRS defines like-kind in the crypto world. Is Ethereum similar enough to
Bitcoin? Would Zcash for Monero qualify? Could I buy swap some spankcoin for some dentacoin? Anyway these are just things to consider. There doesn’t seem to be enough guidance from the IRS to sway you one way or another so be cautious when someone claims they totally CAN or CANNOT qualify as it really is a grey area and may need more clarification from the IRS. The conservative approach would be to pay your taxes on these types of transactions. At the end of the day the new Tax reform that takes effect 1/1/18 only allows real property (real estate) to qualify under 1031. So even if you were able to somehow qualify before 2018, you definitely won’t be able to qualify for 1031 exchange deferent for crypto for 2018 onward.
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