Fellow Steemers, as part 2 of my on-going discussion of cyrptocurrency's and the US Federal Tax laws, I want to dive in to a topic mentioned in the comments of Pt. 1: The Like-Kind Exchange (and how it relates to cryptocurrency)
For any who may have missed it, in Pt. 1 we discussed how cryptocurrency's are currently considered "property" (not a real "currency") by our federal tax authorities. Generally this can be seen as a negative when it comes to tax reporting. Accounting for property is much more onerous than for currencies (in the past this has made sense, you're very much less likely to transact in real estate or other property as opposed to in cash, and the value of any property transaction is usually much larger than a property transaction).
So for today's post, let's get right in to what a like-kind exchange is (as dictated by IRC Section 1031):
- A common exchange is when we trade a piece of property (think real estate, a piece of equipment, etc.) for a cash or debt consideration
- A like-kind exchange is special, in that we are exchanging our property for another piece of property that is deemed as "like-kind"
- So what is like-kind? I'm glad you asked:
- Both properties being exchanged must be held for use in a trade or business or for investment
- Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment
- Both properties must be similar in that like-kind property is property of the same nature, character or class
- Finally, certain types of property are specifically excluded:
- Inventory or stock in trade
- Stocks, bonds, or notes
- Other securities or debt
- Partnership interests
- Certificates of trust
- Transactions that are deemed as like-kind do not trigger an immediate tax bill, but rather a tax deferral. This is the main reason it is used!
Now that we've got the basics out of the way, let's talk about how this may affect you and your cryptocurrency transactions:
- It seems obvious that in many cases trading one crypto for another should qualify as like-kind
- The AICPA has requested clarification from the IRS on this point, but for now I think it is safe (except in the most obvious of circumstances) to assume you can use this rule
- HOWEVER, the most important thing to consider may be the added effort that using this rule gives towards your tax preparation time. As mentioned, a like-kind exchange can defer the taxes you owe, but it also requires completing a very cumbersome form (form 8824) FOR EVERY LIKE-KIND EXCHANGE you want to declare
- Obviously this is not a realistic solution if you are buying or selling .001 BTC of some other cryptocurrency at a time. In this case, you are better off keeping an eye on your transactions and cost basis (see my first tax post for more information)
- However, if you have made any large exchanges (maybe you moved all your BTC into ETH, or are a big time trader), it may be worth consulting with your tax professional about using the like-kind exchange rule to defer some tax expenses!
Please let me know if this advice is useful, and if there are specific situations that you would like me to speak on. I appreciate any and all upvotes and follows
Disclaimer: although I am a registered CPA in the state of California, any thoughts above are merely my understanding of the US tax code and should not be considered tax advise. Further, I am not a Certified Tax Professional or Tax Preparer, and all matters related to filing of your taxes should only be done after consulting with the appropriate professional accountant, lawyer, or other party.