Effective for virtual currency exchanges completed after December 31, 2017, virtual currency users, such as Bitcoin users, can no longer attempt to claim that an exchange of one type of virtual currency for another is a “like-kind” exchange. Presently, virtual currency owners are subject to tax when exchanges are made for dollars, or other goods; however, many owners have diversified their holdings by swapping one virtual currency for another and deferred the tax, relying on §1031 of the Internal Revenue Code (IRC). Going forward, all virtual currency transactions will trigger an immediately taxable event.
This soon-to-be-gone tax break stems from IRC §1031. Currently, this section provides that no gain or loss is recognized at the time of sale, to the extent that the business or investment property sold is exchanged for similar (“like-kind”) business or investment property. Although, the law has not been particularly clear as to whether or not virtual currency technically qualifies for like-kind exchanges, with the 2014 IRS determination that virtual currency is “intangible property,” and thus subject to capital gain, many owners have relied on like-kind exchange deferral.
Pursuant to the Tax Cuts and Jobs Act, enacted December 22, 2017, this loop-hole will be definitively closed. The Act limits, in no uncertain terms, like-kind exchange treatment to real property—and virtual currency is clearly not recognized as such. Virtual currency, like securities, will be prohibited from like-kind exchange treatment.
While virtual currency owners won’t appreciate the Act’s impact on their gains, at least the more defined regulation of virtual currency may promote wider acceptance of it in the mainstream.
If you have questions regarding virtual currency transactions and their tax implications, please contact Frost & Associates, LLC at 410-497-5947.
- The new law will not apply to an exchange if: (a) the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017, or (b) the property received by the taxpayer in the exchange is received on or before December 31, 2017.