Is There A Crypto to Crypto Tax?

On: April 3, 2020

In 2009 Satoshi Nakamoto, the pseudonymous inventor of bitcoin “mined” the first block on the bitcoin blockchain and created a disruptive new tech industry. By August 2018 less than ten years later, over 1,600 new cryptocurrencies had been created. This complicated regulatory uncertainty around crypto by raising the question: Is there a crypto to crypto tax?

Section 1031 Like Kind Exemption for Crypto?

For many years now crypto investors have consulted with tax attorneys over whether there is a like kind exemption for crypto taxes under Tax Code Section 1031. In a 1978 US Tax Court ruling in Koch v. Commissioner, the court says: “Section 1031 refers to property of a like – not an identical – kind. The comparison should be directed to ascertaining whether the taxpayer, in making the exchange, has used his property to acquire a new kind of asset or has merely exchanged it for an asset of like nature or character.” So for example, if the owner of a rental property sold it five years after they purchased it, and the property value had appreciated over those five years, they would realize a capital gain from the sale. This would trigger a tax obligation to the IRS on the capital gains. But if the owner took all the proceeds from the sale and purchased another property that was more expensive than the one they bought five years prior, they would owe no taxes under the Section 1031 like kind exemption.

IRS Rules on Section 1031 and Crypto

Crypto investors have been hopeful that selling bitcoin to buy Stellar, to give an example, would also qualify for this exemption. Without guidance from the IRS, tax attorneys have been hesitant to advise filing taxes this way, counseling that the filer is taking a risk the IRS will disagree. With the Tax Cuts and Jobs Act of 2017, Congress stepped in and settled the question by limiting 1031 exemptions to real estate only, and excluding all other property like precious metals, rare baseball cards, and cryptocurrencies. The IRS offered further clarification in November 2019, when Suzanne Sinno, an attorney in the IRS Office of the Associate Chief Counsel, told the American Institute of CPAs conference that the like kind exemption never applied to crypto to crypto sales/purchases, even before the 2017 tax reform bill.

How to Record Crypto Trades for Taxes

If you use cryptocurrency to buy other cryptocurrency using the thousands of trading pairs on any of the major crypto exchanges, you must note the price of the crypto you buy in USD at the time of each purchase. Your receipts will provide you with a record of the time and amount of crypto for each purchase. You may want to use a robust price tracking tool like TradingView to log the price of the digital asset at the time of each crypto purchase as well. Keep this with your tax records for the IRS. When you go to trade one crypto for another, it creates a potentially taxable capital gains or losses on crypto you’re trading away. Use the value of that crypto in USD at the time it was originally purchased as your cost basis to determine your capital gain or loss.