Tax legislation previous to January 1, 2018 allowed you to defer capital positive aspects taxes once you alternate one property with one other comparable property (also called a Like-Kind exchange). Counting on this tax legislation and the murky crypto tax steering that existed earlier than 2018, some cryptocurrency holders utilized like-kind alternate therapy 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 should not eligible for the like-kind of alternate therapy.
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 acquire or loss upon an alternate of digital forex for different property?
FAQs issued in 2019 (Q16)
“If you happen to alternate digital forex held as a capital asset for different property, together with for items or for one more digital forex, you’ll acknowledge a capital acquire or loss”
With regards 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 alternate therapy for crypto-to-crypto transactions occurred earlier than 2018. Taxpayers who took this place filed Form 8824 (Like-Form Exchanges) to report crypto-to-crypto positive aspects and deferred capital positive aspects.
(The Tax Cuts and Jobs Act (TCJA) restricted like-kind alternate therapy solely to actual property efficient January 1, 2018. Due to this fact, the applicability of like-kind alternate therapy 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 alternate therapy. It’s because these cash should not like-kind in the case of the general design, supposed 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 deal with another cryptocurrencies, or another analyses not mentioned on this recommendation. Accordingly, no inferences ought to 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 alternate therapy, with none doubt. Lastly, if you happen to utilized the like-kind alternate therapy for crypto-to-crypto trades earlier than 2018, it is suggested to speak to a professional tax adviser and weigh your choices.
Disclaimer: this publish is informational solely and isn’t supposed as tax recommendation. For tax recommendation, please seek the advice of a tax skilled.