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Do Section 1031 Exchanges Apply to Pre-2018 Cryptocurrency Transactions?

Posted on in Taxation Law

san jose tax lawyerVirtual currencies have represented a significant investment opportunity for many people over the last several years. Because of the increased level of financial activity surrounding cryptocurrency, the IRS has begun to pay closer attention to these transactions to ensure that investors are paying the required taxes. 

In the past, some cryptocurrency investors have treated transactions in which one type of virtual currency was traded for another as “like-kind” exchanges, which would allow them to defer capital gains taxes on these transactions. The Tax Cuts and Jobs Act of 2017 disallowed the use of tax-free exchanges for personal property in 2018 or later. However, some investors may have used these types of exchanges for transactions that took place before 2018, and they should be aware that they could potentially face tax audits and be required to pay taxes that apply to these transactions.

IRS Guidance on Pre-2018 1031 Exchanges for Bitcoin, Ether, and Litecoin

Since they are addressed in Section 1031 of the IRS tax code, like-kind exchanges are often referred to as “1031 exchanges.” The IRS recently released a memo addressing whether certain types of cryptocurrency transactions qualify as 1031 exchanges. In this memo, the IRS noted that in 2016 and 2017, Bitcoin and, to a lesser extent, Ether, were used to facilitate transactions involving other virtual currencies, since these currencies could be more easily converted to and from U.S. dollars. A person would usually need to acquire Bitcoin or Ether before trading for other virtual currencies, or someone who wished to liquidate another cryptocurrency they owned would usually need to trade their currency for Bitcoin or Ether first.

Because Bitcoin and Ether differed substantially from other currencies, including Litecoin, exchanges between Bitcoin and Litecoin or Ether and Litecoin would not qualify as like-kind exchanges. At the same time, Bitcoin and Ether differ from each other in a variety of ways, so exchanges between these two cryptocurrencies would also not be considered like-kind exchanges. While the IRS’s memo specifically mentioned these three virtual currencies, it is likely that these same rules would apply for most transactions in which one type of cryptocurrency was traded for another.

Contact a San Jose Tax Law Attorney for Cryptocurrency

If you own virtual currency or have traded in cryptocurrency in the past, you will want to be aware of how taxes apply to these transactions. The IRS may attempt to collect the taxes that would have originally applied to pre-2018 transactions that were classified as like-kind exchanges. If you are facing a tax audit or are concerned about whether you may owe money to the IRS, John D. Teter Law Offices can advise you of your options, and we will help you determine how to minimize your taxes and penalties as you resolve these matters. Contact our San Jose, CA tax audit lawyer at 408-866-1810.


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