Swapping Virtual Currencies will trigger tax obligations under the Tax Cuts and Jobs Act

Foodman CPAs & Advisors
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There are investors that have an interest in “exchanging or swapping” Virtual Currency (VC).  Prior to the passage of the Tax Cut and Jobs Act (TCJA), VC investors could take the position that if they “exchanged or swapped” one VC with another (for instance Bitcoin for Ethereum or Litecoin), the transaction would be tax deferred under Section 1031 of the Internal Revenue Code (like-kind exchange).  According to the Internal Revenue Code:


⦁    “if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031”
⦁    “Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties”
⦁    “IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free”
⦁    “To accomplish a Section 1031 exchange, there must be an exchange of properties.  The simplest type of Section 1031 exchange is a simultaneous swap of one property for another”

TCJA amends Internal Revenue Code Section 1031

The TCJA amends Section 1031 such that only “real property” is the only type of property eligible for like-kind exchanges as noted:  “SEC. 13303. LIKE-KIND EXCHANGES OF REAL PROPERTY. 13 (a) IN GENERAL.—Section 1031(a) (1) is amended by striking ‘‘property’’ each place it appears and inserting ‘‘real property’’, “the amendments made by this section shall apply to exchanges completed after December 31, 2017”.  

VC investors that relied on the law to exchange one VC for another VC without paying taxes and or creating tax obligations can no longer treat the transaction as a like-kind exchange under the TCJA.

Don’t be a victim of your own making

There is limited guidance from the US Treasury and VC investors ought to proceed cautiously.   It is evident that the TCJA only allows for “real estate” to partake in a tax-free 1031 exchange.  VC investors can no longer utilize VC swaps as a “diversification” tool without triggering a tax obligation.  
The TCJA eliminated a perceived “loophole” that allowed VC investors to obtain an “in kind” exemption when swapping VC.  The fact that the “in-kind” exemption only applies to real estate going forward closes this loophole.  This means that all VC transactions are taxable, and VC investors ought to consult and obtain guidance from a specialized tax professional for the tax treatment of all VC transactions.  


 

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