Source: http://www.taxabletalk.com/2017/09/05/can-you-use-a-%C2%A71031-exchange-to-defer-gain-with-cryptocurrency/
Timestamp: 2019-04-21 12:24:37+00:00

Document:
Can You Use a §1031 Exchange to Defer Gain with Cryptocurrency?
I recently wrote an article noting that if you exchange one cryptocurrency for another you have a capital gain (or loss). I was recently asked if you could defer such a gain by using a §1031 Exchange.
(1) In General No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
Well, there’s the first two hurdles: Is cyrptocurrency held for productive use in a trade or business or for investment? Well, cryptocurrency likely isn’t held for productive use in a trade or business but it certainly is held by some for investment.
There’s a problem here: The closest analog to how cyrptocurrency should be treated are stocks and bonds. And §26 USC (a)(2)(B) states that you can’t do a §1031 exchange for stocks and bonds.
“But Russ,” you say, “cyrptocurrency isn’t stocks or bonds. It’s a virtual currency. So if I exchange Bitcoin for Ethereum, that should be ok, right?” Let’s assume that §26 USC (a)(2)(B) doesn’t apply. Are Bitcoin and Ethereum like-kind property?
Unfortunately, the answer is a maybe, with “no” more likely than “yes.” The IRS has been asked to look at exchanging gold bullion for gold coins, gold coins for other gold coins, and gold bullion for silver bullion as §1031 exchanges. You can use a §1031 exchange to exchange Mexican 50 peso gold coins for Austrian 100 corona gold coins and gold bullion for Canadian Maple Leaf gold coins. However, you cannot use a §1031 exchange to exchange gold bullion held for investment for silver bullion held for investment (different metals used in different ways), $20 gold numismatic-type coins for South African Krugerrand bullion-type gold coins (different underlying investments and different valuation bases), and Swiss Francs for US Double Eagle Gold Coins (numismatic versus circulating currency).
I believe the IRS would likely rule that Bitcoin and Ethereum are two different underlying investments and do not qualify for like-kind treatment.
But let’s further assume I’m wrong, and they do qualify. You go on a Bitcoin exchange and swap n Bitcoins for x Ethereum. Is that a §1031 Exchange?
Well, there are numerous technical rules regarding a §1031 exchange. First, they must be reported on IRS Form 8824 so the idea of simply ignoring them on your tax return is a certain way to make sure your transaction is not a §1031 exchange. There are 67 pages of regulations on §1031 exchanges (search for “1031” in the link for them). Most §1031 exchanges use a Qualified Intermediary. Certainly the dealer I use is that Qualified Intermediary, right?
Well, almost certainly not. When you use an Exchange to buy a cryptocurrency, the dealer almost certainly doesn’t meet the technical requirements listed in the regulations. There is no paperwork; the trades occur close to instantly (not over the months it takes to complete a §1031 exchange); and several other issues with a dealer.
This is the most likely to meet IRS scrutiny, but only if the IRS considers Bitcoin and Ethereum to be like-kind. The tax professional community has asked the IRS to give guidance on this, but the IRS (to date) has ignored this issue. You could request a Private Letter Ruling from the IRS. A Private Letter Ruling is a means to get an answer from the IRS given a specific set of facts. The Private Letter Ruling binds the requestor and the IRS. However, you must pay for a Private Letter Ruling; the cost will be at least $2,400. It also takes time to receive the Private Letter Ruling (think months, not weeks).
The conclusion I’ve drawn is that most exchanges of one cryptocurrency for another do not qualify as §1031 exchanges and it’s more likely than not that the IRS will rule that two different cryptocurrencies are not eligible for like-kind treatment.
This entry was posted on Tuesday, September 5th, 2017 at 12:42 pm	and is filed under Cryptocurrencies. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

References: §1031
 §1031
 §26
 §1031
 §26
 §1031
 §1031
 §1031
 §1031
 §1031
 §1031
 §1031
 §1031
 §1031
 §1031