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Can you do a 1031 exchange on Cryptocurrency?

I got a million ways to get it, choose one (choose one)

Hey, bring it back, now double your money and make a stack

I’m on to the next one

On to the next

I’m on to the next one

On to the next

I’m on to the next one

On to the next

I’m on to the next one

On to the next

Hold up, (freeze, hey)

Somebody bring me back some money, please

-Swizz Beatz, On To The Next One

Who doesn’t love a tax loophole? But what happens when the tax loophole is closed? Taxpayers who made coin-to-coin trades (e.g., Bitcoin to Ethereum) may mistakenly assume there is no tax liability because they did not receive any actual funds. Given the IRS’s treatment of cryptocurrency as property, however, cryptocurrency trades are subject to the same capital gains and loss rules as all other property exchanges. The debate uses to be that if bitcoins were considered the personal property then it might potentially qualify for Section 1031 exchange. A 1031 exchange gets its name from Section 1031 of the U.S. Internal Revenue Code (IRC), which allows you to avoid paying capital gain taxes when you sell an investment property and reinvest the proceeds from the sale within certain time limits in a property or properties of like kind and equal or greater value. Well, the debate was ended after the passing of the Tax Cut and Jobs Act (TCJA) which took effect on January 1, 2018. Under this tax law, bitcoin does not qualify for a like-kind exchange under Section 1031.

Lets talk about it.

Prior to the TCJA, it was possible to argue that cryptocurrency trades could qualify for 1031 exchange. But there were inherent problems in the applicability of IRC section 1031 to these trades, since they may have failed to meet certain requirements. For example, the currencies are not necessarily “like-kind” properties. In addition, reporting such trades under IRC section 1031 must be done properly, using Form 8824 and listing every trade. The TCJA ended this debate by limiting 1031 like-kind exchanges to real property, not for sale; starting with the tax year 2018, therefore, this treatment of cryptocurrencies will no longer be even theoretically viable. Real property is land and any property attached directly to it

Some taxpayers and accountants have attempted to delay capital gains income on cryptocurrency-to-cryptocurrency trades by classifying the trades as IRC section 1031 like-kind exchanges, whereby they can defer income to the replacement position’s cost basis. This was a risky strategy that will not work under a tax audit. If you used this strategy on a previous tax return, I would recommend that you consult with a qualified tax accountant about your amendment options. You don’t want to wait and see if the IRS will audit your tax returns. Please don’t consult with an accountant that says that “cryptocurrency to cryptocurrency trades are not taxable.” This would be a sign to find another tax accountant. Don’t assume that all tax accountants know cryptocurrency tax law. Take a proactive approach to protect yourself. There may be a chance that you can possibly abate some accuracy penalties.

Cryptocurrency tax laws are expected to change. There is a major battle going on between the blockchain industry and the government. This article may be completely outdated in a year or two. It is very important not to make “rush” decisions when selling or exchanging your cryptocurrencies. Always have a conversation with your tax accountant before making any cryptocurrency-related transactions. Don’t just assume since you read a couple of online articles that you know everything about the tax law.

Need help with your crypto taxes? Well, contact Jamaal "Crypto J" at jamaal@jstaxcorp.com!

Podcast: https://anchor.fm/36chamberscryptotaxes

Website: www.36chambersofcryptotaxes.com

YouTube: https://www.youtube.com/channel/UCNoiZj7UxmuMrPtyIaSX41Q

IG: @36chamberscryptotaxes

Twitter: 36cryptotaxes

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