IRS denies tax-free crypto exchanges to crypto exchanges

The IRS says that trading one type of crypto for another is taxable, even if no money changes hands. However, what was it before January 1, 2018, was it tax exempt? You haven’t received any money, so there shouldn’t be any income or gain for the IRS to tax, right? If the IRS pulls all the crypto data it gets and audits you, will it allow it? The tax law has been amended by law to say that as of January 1, 2018, crypto transactions are taxable. Implicitly, doesn’t that mean they were tax-exempt in 2017 and before? You might think these questions are no longer relevant, because 2017 is long gone. The 2017 tax returns were due on April 15 or October 15, 2018. The normal three-year limitation period should run three years after you file your return. But a six-year statute of limitations can apply to many of these situations, giving the IRS until 2024 to perform an audit.

If you don’t have any reporting product at all, of course, the statute of limitations never runs. The same is true if you deposit fraudulently. Additionally, once an IRS audit begins, the IRS routinely requests audit time extensions. Most tax advisers will tell you to agree, even if giving the IRS more time seems to give burglars more time before calling the police. If you don’t extend, you are usually hit with a very bad decision that you have to go to court to try to undo. So the great debate over the crypto exchange is still relevant today, and the IRS has just confirmed it. On June 18, 2021, the IRS released Chief Legal Counsel 202124008 to determine whether an exchange of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin or (iii) Ether for Litecoin is considered an exchange of the same nature under Section 1031 of the tax code. You guessed it, according to the IRS, these three swaps, which were cashless, were taxable even before 2018.

It’s no secret that the IRS is heavily researching crypto, with warnings and even a series of invocations from John Doe on the exchanges. There is even a question now about Form 1040 tax returns. The big tax law passed in December 2017 made it clear that trading from one crypto for another is not exempt from tax as of 2018. As of In previous years, the IRS has been questioned several times about this, but has remained silent until now. Basically, a 1031 exchange is an exchange of one trading or investment asset for another. Under the tax code, most swaps are taxable, as is a cash sale. This is one of the reasons the IRS has taken on the barter community for taxing traded goods and services. Section 1031, an exception to the rule that swaps are fully taxable, allows you to change the form of your investment by paying taxes.

Your tax base remains the same, going from what you have given up to what you have acquired. This way your investment continues to grow tax free. If you qualify, there is no limit to the number of times you can trade 1031. Real estate investors carry over their gain from one investment to another. Despite the profits on each swap, they avoid tax until they sell for cash years later, paying only one tax, ideally as a long-term capital gain.

The IRS announced in 2014 that crypto is property for tax purposes. Perhaps this is the shot heard in the crypto world. And while there has been limited crypto tax advice since then, many big questions remain. Most crypto holders hold it for investment purposes, but what about the rule of the same kind? Exchanging silver for gold would be taxable, but different types of crypto are arguably like different types of gold coins. If you could trade one type of gold coin for another before 2018, why not crypto?

The IRS begins by describing Bitcoin, Ether, and Litecoin. Crypto exchanges allow users to trade one crypto for another, as well as fiat like the US dollar. Major cryptos like Bitcoin and Ether can usually be traded for any other. However, some can only be exchanged for a limited number of other cryptos and cannot be exchanged for fiat currency at all. The IRS says a popular exchange supports more than 30 different cryptocurrencies, but almost all of them could be acquired with or traded only for Bitcoin, Ether, or fiat. In 2017, there were over 1,000 different cryptocurrencies. The IRS says that in 2016 and 2017, most exchanges required Bitcoin or Ether to trade. It was similar on sale, trading for Bitcoin or Ether first. For this reason, the IRS claims that Bitcoin and Ether were each different in nature and character from Litecoin.

Therefore, the IRS concludes that Bitcoin and Litecoin (BTC / LTC) are not considered to be similar, neither are Ether and Litecoin (ETH / LTC). The IRS then considers Bitcoin and Ether against each other. They share similar qualities and uses, according to the IRS, but are fundamentally different in design, intended use, and actual use. The IRS claims that the Bitcoin network is designed to act as a payment network for which Bitcoin acts as the payment unit. The Ethereum blockchain was intended to serve as a payment network and platform for operating smart contracts and other applications, with Ether as its fuel, according to the IRS. Ether and Bitcoin are both used to make payments, but the IRS concludes that Bitcoin and Ether are not of the same nature.

There will invariably be questions about other trades, and the IRS does not address them. In fact, the ruling says he only covers Bitcoin, Ether and Litecoin. Also, even for those it covers, this IRS notice (to IRS employees) is not authoritative. There are still good arguments that pre-2018 swaps were OK, and that’s probably not the last word on the subject.

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