The IRS recently released guidance (ILM 202124008) holding that certain exchanges of Bitcoin, Ether, and Litecoin that occurred before the Tax Cuts and Jobs Act (TCJA) do not qualify for like-kind exchange treatment under Section 1031.
Prior to TCJA’s enactment, Section 1031 provided that no gain or loss was recognized on the exchange of property for property of a like-kind, which could have included exchanges of some personal property and exchanges of real property. The TCJA amended Section 1031 to provide that Section 1031 treatment was restricted to exchanges of real property.
Generally, in order to qualify for like-kind exchange treatment, the property exchanged must be the same nature or character (not the grade or quality).
In prior guidance, the IRS established that virtual currency was property for U.S. federal income tax purposes, and that general tax principles applicable to property transactions apply to transactions involving convertible virtual currency. The IRS concluded in the new guidance that exchanges of: (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin, or (iii) Ether for Litecoin prior to 2018 do not qualify as a like-kind exchange under Section 1031.
The IRS cited two old revenue rulings (Rev. Rul. 79-143 and Rev. Rul. 82-166) that each ruled that Section 1031 did not apply to support its conclusions. For example, Rev. Rul. 82-166 concluded that an investor who exchanged gold bullion for silver bullion was required to recognize gain because gold bullion was not like-kind property with respect to silver bullion for purposes of Section 1031.
In its analysis, the IRS compared Litecoin to Bitcoin and Ether and determined that Bitcoin and Ether “played a fundamentally different role from other cryptocurrencies” during 2016 and 2017. The IRS noted that Bitcoin and Ether were the most regarded cryptocurrencies and served as an “on-and-off ramp” because taxpayers often needed to purchase Bitcoin or Ether before being able to purchase another coin, such as Litecoin.
The IRS also concluded that Bitcoin and Ether were not like-kind property because of their differences in overall design, intended use, and actual use.
Contact:
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.