Tax regulation previous to January 1, 2018 allowed you to defer capital positive factors taxes whenever you trade one property with one other comparable property (also called 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 trade remedy to crypto-to-crypto trades and paid no taxes on positive factors. A new IRS memorandum released today reaffirms that transactions between bitcoin, ether & litecoin aren’t eligible for the like-kind of trade 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 trade of digital foreign money for different property?
FAQs issued in 2019 (Q16)
“In case you trade digital foreign money held as a capital asset for different property, together with for items or for one more digital foreign money, you’ll acknowledge a capital achieve or loss”
In relation to 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 trade remedy for crypto-to-crypto transactions occurred earlier than 2018. Taxpayers who took this place filed Form 8824 (Like-Type Exchanges) to report crypto-to-crypto positive factors and deferred capital positive factors.
(The Tax Cuts and Jobs Act (TCJA) restricted like-kind trade remedy solely to actual property efficient January 1, 2018. Subsequently, the applicability of like-kind trade remedy for crypto is now not a controversial subject)
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 trade remedy. It’s because these cash aren’t like-kind on the subject of 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 handle some other cryptocurrencies, or some other analyses not mentioned on this recommendation. Accordingly, no inferences needs to be made primarily based on this chief counsel recommendation that aren’t explicitly set forth on this recommendation”.
That mentioned, if we apply the evaluation used on this memorandum on different cryptocurrency transactions, virtually all crypto-to-crypto trades could be thought-about taxable occasions and never eligible for the like-kind trade remedy, with none doubt. Lastly, in case you utilized the like-kind trade remedy for crypto-to-crypto trades earlier than 2018, it is suggested 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.