Does Cryptocurrency/Bitcoin Qualify for 1031 Exchange Treatment?

In recent months, the idea that cryptocurrency such as Bitcoin might qualify for 1031 exchange treatment under tax law has been debatable. However, the new Tax Cuts and Jobs Act of 2017, passed in December, ends that discussion. Under this new law, trades of digital currencies do not qualify for 1031 “like-kind” exchanges.

Narrowing 1031 exchanges to real property

According to LuSundra, who is also known as the Home Biz Tax Lady, cryptocurrency does not qualify based on the addition of a single word. “The Tax Cuts and Jobs Act (Tax Reform) added one word: ‘Real’. 1031 exchange is restricted to Real Property, that is to say Real Estate: land and buildings.” Before the passage of the Tax Cuts and Jobs Act, 1031 like-kind exchanges applied to “property held for productive use in a trade or business or for investment.” However, the addition of “real” changes the meaning of this section substantially.

Elizabeth A. Whitman, who is of Counsel with Washington DC’s Mirsky Law Group, LLC, and previously served as General Counsel for Wilkinson 1031, LLC, a Section 1031-qualified real estate securities firm, agrees with this analysis.

“Although currency generally does not qualify for like-kind exchange on Section 1031 exchange, bitcoin generally is considered to be property, not currency, for tax purposes,” explains Whitman. “The debate about whether bitcoin qualified for Section 1031 has revolved around determining what type of property bitcoin is. If bitcoin were considered personal property, then until January 1, 2018, it might potentially have qualified for Section 1031 Exchange. However, in the Tax Cut and Jobs Act, which took effect on January 1, 2018, Congress eliminated Section 1031 for all types of property except for real estate. Since it is clear that bitcoin is not real estate, the debate about what type of property bitcoin no longer is relevant for Section 1031 purposes. Under the new tax law, bitcoin does not qualify for like-kind exchange under Section 1031.”

Cryptocurrency and tax law

Cryptocurrency users must report income, both domestic and foreign, and capital gains from all digital currencies, including Bitcoin; they may also need to file an FBAR. Trading virtual currencies may result in capital gains, and when it does, a taxpayer must pay taxes on those capital gains—the rate being determined by the duration of their holding of the cryptocurrency, of course. Those capital gains that are short-term are typically taxed like income, while capital gains on assets that were held in excess of one year are considered to be long-term gains, and are taxed at a lower rate tied to the taxpayer’s bracket: 0%, 15%, 20% or 23.8%.

Regulations covering cryptocurrency are continuously changing, and are also very complex. The new tax law has, frankly, further confused the issues for taxpayers holding cryptocurrencies as well as those involved in the trading, mining, investing, buying, and selling of digital currency. It makes the most sense to consult with a tax attorney who is well-versed in cryptocurrency issues before making any decisions in the realm of virtual currencies and compliance. For a detailed consultation with our aggressive team of CPAs, tax lawyers, and EAs, reach out to the Tax Law Office of David W. Klasing; call (800) 681-1295 or contact us online today.