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Tax law prior to January 1, 2018 allowed you to defer capital gains taxes when you exchange one property with another similar property (also known as a Like-Kind exchange). Relying on this tax law and the murky crypto tax guidance that existed before 2018, some cryptocurrency holders applied like-kind exchange treatment to crypto-to-crypto trades and paid no taxes on gains. A new IRS memorandum released today reaffirms that transactions between bitcoin, ether & litecoin are not eligible for the like-kind of exchange treatment.
Like-kind Exchanges & Cryptocurrency Taxes
In 2014 and 2019, the IRS mentioned that crypto-to-crypto trades are taxable.
IRS Notice 2014-21 issued in 2014 (Q-6)
Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?
A-6: Yes.
FAQs issued in 2019 (Q16)
“If you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss”
When it comes to authority, tax law takes priority over tax notices like 2014-21 and FAQs published in the IRS website. So, relying on more authoritative §1031 of IRS tax code, some taxpayers applied like-kind exchange treatment for crypto-to-crypto transactions occurred before 2018. Taxpayers who took this position filed Form 8824 (Like-Kind Exchanges) to report crypto-to-crypto gains and deferred capital gains.
(The Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment only to real estate effective January 1, 2018. Therefore, the applicability of like-kind exchange treatment for crypto is no longer a controversial topic)
IRS Chief Counsel Memorandum Issued In June 2021
The Memorandum (Number: 202124008) released on June 18, 2021 explicitly mentions that exchanges between bitcoin, Litecoin and ether prior to January 1, 2018 are not eligible for the like-kind exchange treatment. This is because these coins are not like-kind when it comes to the overall design, intended use, actual use, nature and character.
It also says that the advice given here is “limited to the exchanges involving Bitcoin, Ether, or Litecoin. This chief counsel advice does not address any other cryptocurrencies, or any other analyses not discussed in this advice. Accordingly, no inferences should be made based on this chief counsel advice that are not explicitly set forth in this advice”.
That said, if we apply the analysis used in this memorandum on other cryptocurrency transactions, almost all crypto-to-crypto trades would be considered taxable events and not eligible for the like-kind exchange treatment, without any doubt. Finally, if you applied the like-kind exchange treatment for crypto-to-crypto trades before 2018, it is recommended to talk to a qualified tax adviser and weigh your options.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.