Tax legislation previous to January 1, 2018 allowed you to defer capital positive aspects taxes if you change one property with one other related property (also referred to as a Like-Kind exchange). Counting on this tax legislation and the murky crypto tax steerage that existed earlier than 2018, some cryptocurrency holders utilized like-kind change remedy to crypto-to-crypto trades and paid no taxes on positive aspects. A new IRS memorandum released today reaffirms that transactions between bitcoin, ether & litecoin are usually not eligible for the like-kind of change remedy.
Like-kind Exchanges & Cryptocurrency Taxes
In 2014 and 2019, the IRS talked about that crypto-to-crypto trades are taxable.
“When you change 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 acquire or loss”
Relating to authority, tax legislation takes precedence over tax notices like 2014-21 and FAQs revealed within the IRS web site. So, counting on extra authoritative §1031 of IRS tax code, some taxpayers utilized like-kind change remedy for crypto-to-crypto transactions occurred earlier than 2018. Taxpayers who took this place filed Form 8824 (Like-Variety Exchanges) to report crypto-to-crypto positive aspects and deferred capital positive aspects.
(The Tax Cuts and Jobs Act (TCJA) restricted like-kind change remedy solely to actual property efficient January 1, 2018. Subsequently, the applicability of like-kind change remedy for crypto is 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 change remedy. It is because these cash are usually not like-kind in terms 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 tackle another cryptocurrencies, or another 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 of taxable occasions and never eligible for the like-kind change remedy, with none doubt. Lastly, for those who utilized the like-kind change remedy for crypto-to-crypto trades earlier than 2018, it is strongly recommended to speak to a certified tax adviser and weigh your choices.
Disclaimer: this submit is informational solely and isn’t meant as tax recommendation. For tax recommendation, please seek the advice of a tax skilled.