Are Cryptocurrency Trades Eligible for Like-Kind Exchange Treatment Under Section 1030?

Under Section 1030 of the Internal Revenue Code, transactions that qualify as like-kind exchanges are eligible for tax deferral. As summarized by Internal Revenue Service (IRS), Section 1030, “allows you to postpone paying tax on the gain [from a sale] if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.” While cryptocurrency trades might seem like like-kind exchanges, a recent Memorandum from the IRS Office of Chief Counsel indicates that this isn’t necessarily the case. US International Tax Advisors, explains:

What Does the IRS Office of Chief Counsel’s Memorandum Say?

On June 18, 2021, the IRS Office of Chief Counsel issued a Memorandum discussing tax implications of three specific types of cryptocurrency trades: (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin and (iii) Ether for Litecoin—all conducted prior to January 1, 2018. It issued the Memorandum in response to a specific question, and thus the Memorandum does not address similar trades after this date (which was the date the IRS began requiring taxpayers to report cryptocurrency gains) or similar trades involving other cryptocurrencies.

According to the Memorandum, trades of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin and (iii) Ether for Litecoin conducted prior to January 1, 2018 do not qualify as like-kind exchanges under Section 1030. This is based on the Office of Chief Counsel’s analysis of the differences between these three cryptocurrencies—as they existed prior to 2018. Whether post-2018 trades and trades involving other cryptocurrencies and alt currencies qualify for like-kind exchange tax deferral is a matter that taxpayers currently need to address on a case-by-case basis. This won’t be easy; and, with the IRS’s current focus on cryptocurrency, taxpayers will need to be extremely careful to avoid making the wrong decisions and exposing themselves to audits, investigations and penalties.

What Should You Do if You Have Concerns About Your Crypto Taxes?

The Office of Chief Counsel’s Memorandum is just the latest in a recent string of efforts by the IRS to crack down on tax compliance for cryptocurrency investors. The IRS has delivered warning letters to tens of thousands of cryptocurrency investors, and it has issued “John Doe” summonses to cryptocurrency exchanges in order to identify taxpayers who may be delinquent on their reporting and payment obligations.

If you have concerns about your crypto tax liability, you should consult with a Maryland tax attorney. The IRS generally views taxpayers in a more favorable light when they correct their past mistakes proactively as opposed to waiting to hear from agents or investigators. There are options available for correcting past mistakes (and potentially reducing the amount you owe), and an experienced attorney should be able to help protect you to the fullest extent possible.

Request a Confidential Consultation with a Maryland Tax Attorney

If you need to know more about the federal tax laws that apply to cryptocurrency investors in the U.S., we encourage you to contact us promptly. To request a confidential consultation with US International Tax Advisors, call 844-796-8565, or tell us how we can reach you online now.