IRS Notice 2014-21 vs. Code Section 1031 "Like-Kind"

[stupid_seb]

DISCLAIMER: I am not a tax advisor... this is only for discussion
(check my nickname for God's sake!!)



We are all preparing taxes, but tax regulation is not clear at the moment.

1- THE CRYSTAL CLEAR PART:

IRS stated in the Notice 2014-21 that Cryptocurrencies are "PROPERTY"
"For federal tax purposes, virtual currency is treated as property. General tax
principles applicable to property transactions apply to transactions using virtual
currency. "

Trading vs. the USD pair and generating gains are taxable events:
A taxpayer generally realizes
"capital gain or loss on the sale or exchange of virtual currency that is a capital asset in
the hands of the taxpayer. For example, stocks, bonds, and other investment property
are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the
sale or exchange of virtual currency that is not a capital asset in the hands of the
taxpayer."


2- THE ELEPHANT IN THE ROOM: "Like Kind"

"Like-Kind" qualification allows the taxpayer to consider some exchanges without generating a tax liability.
A like-kind exchange under United States tax law, also known as a 1031 exchange, is a transaction or series of transactions that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset.

It technically says that you can treat cryptocurrency trades as like-kind, and not count them in your tax liability.

The immediate consequence is that you would ONLY pay taxes on transactions involving the USD:
- BTC/USD, ETH/USD, LTCUSD or similar trades
- Cashing-out cryptos for USD

The new 2018 tax law is out, and clarified the "like-kind": only for "REAL property" (ie: real estate and tangible assets)

It clarified the panorama regarding "Property" taxation for 2018, but also created a wschism with 2017.
Some experts are therefore suggesting that like-kind would be OK for 2017. (because the IRS HAD TO change the law for 2018)

https://www.forbes.com/sites/robertwood/2017/12/28/loophole-allows-tax-free-bitcoin-exchanges-into-2018/#4ddf204612fa
<<Some say the fact that Congress changed the law (prospectively) makes it clear that before the change in the law, crypto swaps were OK. Others say the reverse. It is not clear what the IRS will say.>>


3- WHAT TO DO ?

I would admit... I don't know.
From a pure legal perspective, the 2018 clarification does not apply to 2017, hence like kind exchanges would apply for cryptocurrencies.
From a "risk/reward" point of view, the 2017 tax law give the taxpayer interpretation of how to declare taxes: the IRS can come back and DECIDE that the way you did your taxes is not correct, and give you a hefty fine (I'd still personally consider such fine as totally illegal because the law for 2017 is not clear... but it's another topic).


-> did anyone already looked at this ??
What are your plans for the tax season ? pay only on your USD related trades and "exits", od declare EVERY SINGLE TRADE form every single exchange as a tax liability ?


Thanks.
P.S.: your CPA is clueless... your tax attorney knows.


Links:
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
http://fortune.com/2017/12/21/bitcoin-tax/

[stupid_seb]

Nobody has any clue ?

[chaoscoinz]

Disclaimer
"This is my personal opinion, my two cents on the matter.  I am not an attorney,  or financial advisor. Please consult your local proffessional for any legal, financial or tax advice."

Im afraid you're not the only one on the boat in the this case, as you see, all of us are in similar predicaments.  The best thing to do is consult a professional, and go over all of your logs of transaction history.
 
   Like kind exchanges can only be with real estate, they fixed the legal loophole last year, so it's best to take the safe route and pay the capital gains according to your transaction history, for each and every time you triggered a tax liability last year reguarding crypto coins.
  
     If you have had any amount of $10,000 or more at any time last year within a foreign crypto exchange, you may, or may not have to file an FBAR, and FATCA report on your foreign holdings.
It doesn't matter if it's crypto or not, if the value of your holdings exceeded $10,000 or more, you might want to play it safe and file. It's a fuzzy grey area and theres not too much guidance on this subject yet.

Here is an article highlighting some information reguarding the matter.
https://cointelegraph.com/news/virtual-currency-exchanges-and-us-customers-beware-irs-is-coming-expert-blog

[stupid_seb]

Disclaimer
"This is my personal opinion, my two cents on the matter.  I am not an attorney,  or financial advisor. Please consult your local proffessional for any legal, financial or tax advice."

Im afraid you're not the only one on the boat in the this case, as you see, all of us are in similar predicaments.  The best thing to do is consult a professional, and go over all of your logs of transaction history.
 
   Like kind exchanges can only be with real estate, they fixed the legal loophole last year, so it's best to take the safe route and pay the capital gains according to your transaction history, for each and every time you triggered a tax liability last year reguarding crypto coins.
  
     If you have had any amount of $10,000 or more at any time last year within a foreign crypto exchange, you may, or may not have to file an FBAR, and FATCA report on your foreign holdings.
It doesn't matter if it's crypto or not, if the value of your holdings exceeded $10,000 or more, you might want to play it safe and file. It's a fuzzy grey area and theres not too much guidance on this subject yet.

Here is an article highlighting some information reguarding the matter.
https://cointelegraph.com/news/virtual-currency-exchanges-and-us-customers-beware-irs-is-coming-expert-blog

I get all that.
The point is... there is no expert.
It's not a CPA issue but a tax lawyer issue here. Safe route can trigger x10 more tax liability than just "respecting the law" as blurry as the law is...

[chaoscoinz]

Disclaimer
"This is my personal opinion, my two cents on the matter.  I am not an attorney,  or financial advisor. Please consult your local proffessional for any legal, financial or tax advice."

Im afraid you're not the only one on the boat in the this case, as you see, all of us are in similar predicaments.  The best thing to do is consult a professional, and go over all of your logs of transaction history.
 
   Like kind exchanges can only be with real estate, they fixed the legal loophole last year, so it's best to take the safe route and pay the capital gains according to your transaction history, for each and every time you triggered a tax liability last year reguarding crypto coins.
  
     If you have had any amount of $10,000 or more at any time last year within a foreign crypto exchange, you may, or may not have to file an FBAR, and FATCA report on your foreign holdings.
It doesn't matter if it's crypto or not, if the value of your holdings exceeded $10,000 or more, you might want to play it safe and file. It's a fuzzy grey area and theres not too much guidance on this subject yet.

Here is an article highlighting some information reguarding the matter.
https://cointelegraph.com/news/virtual-currency-exchanges-and-us-customers-beware-irs-is-coming-expert-blog

I get all that.
The point is... there is no expert.
It's not a CPA issue but a tax lawyer issue here. Safe route can trigger x10 more tax liability than just "respecting the law" as blurry as the law is...

Agreed, there isn't much regulation today, but it's coming in slowly, on February the 6th I believe, the SEC and CFTC will hold an important meeting reguarding all of these matters.
https://cointelegraph.com/news/us-sec-cftc-to-focus-100-on-crypto-in-dedicated-hearing-next-week
 What else can we do as investors and speculators but wait and see? It's best to be thankful they give guidance at all. They could just drop the ball and start swinging the ban hammer around.

[stupid_seb]

Disclaimer
"This is my personal opinion, my two cents on the matter.  I am not an attorney,  or financial advisor. Please consult your local proffessional for any legal, financial or tax advice."

Im afraid you're not the only one on the boat in the this case, as you see, all of us are in similar predicaments.  The best thing to do is consult a professional, and go over all of your logs of transaction history.
 
   Like kind exchanges can only be with real estate, they fixed the legal loophole last year, so it's best to take the safe route and pay the capital gains according to your transaction history, for each and every time you triggered a tax liability last year reguarding crypto coins.
  
     If you have had any amount of $10,000 or more at any time last year within a foreign crypto exchange, you may, or may not have to file an FBAR, and FATCA report on your foreign holdings.
It doesn't matter if it's crypto or not, if the value of your holdings exceeded $10,000 or more, you might want to play it safe and file. It's a fuzzy grey area and theres not too much guidance on this subject yet.

Here is an article highlighting some information reguarding the matter.
https://cointelegraph.com/news/virtual-currency-exchanges-and-us-customers-beware-irs-is-coming-expert-blog

I get all that.
The point is... there is no expert.
It's not a CPA issue but a tax lawyer issue here. Safe route can trigger x10 more tax liability than just "respecting the law" as blurry as the law is...

Agreed, there isn't much regulation today, but it's coming in slowly, on February the 6th I believe, the SEC and CFTC will hold an important meeting reguarding all of these matters.
https://cointelegraph.com/news/us-sec-cftc-to-focus-100-on-crypto-in-dedicated-hearing-next-week
 What else can we do as investors and speculators but wait and see? It's best to be thankful they give guidance at all. They could just drop the ball and start swinging the ban hammer around.

I fully agree.
We should expect guidance on the 6th.

I see 2 outcomes:
1- they say we have to threat tokens like stocks, hence declare every trade as a taxable event.
Then, it's up to lobbies and lawyers to explain the IRS that such "post-event" precision is unfair because it impacts the way people would have traded.
2- they go for a mild approach and say that people should only, for 2017, declare FIAT exchanges (GDAX or exits). Which will make things simpler, especially if they consider your entry point as the point you purchased the BTC (and if you traded this 1BTC and made 5BTC...the 5BTC have the same entry point as the 1st one for instance).
This position would also be reconfirming 2018 position on the "NO-LIKE-KIND", which is clear, and very fair.


Let's hope for guidance! It's the role of the SEC.

[audaciousbeing]

To get a perfect clue of what is going on, I think the IRS needs to do more in providing case studies on how to go about this dicey areas of the law or maybe some tax professionals should have come out with publications on specific treatments. Over here, when the law is not straight forward on certain aspects of tax, there are reports by organisations, publications, and even forums where organized by the big 4 accounting firms where such issues are being discussed and a communique is issued at the end that is relied upon until the tax authority do the right thing.

The fact is, the drafters of the law themselves are yet to have an idea on how to go about it but what they are after is to have some sections of the law to rely upon when prosecuting people for tax evasion.

[ICOWATERCoin]

Hope for a good solution for us.

[r01k]

If the law ends up confirming that EVERY trade is tax-liable it's gonna be a PITA to keep track of it all. Exchanges give you different trade history in different formats and dissimilar base coins.

[squatter]

Agreed, there isn't much regulation today, but it's coming in slowly, on February the 6th I believe, the SEC and CFTC will hold an important meeting reguarding all of these matters.
https://cointelegraph.com/news/us-sec-cftc-to-focus-100-on-crypto-in-dedicated-hearing-next-week
What else can we do as investors and speculators but wait and see? It's best to be thankful they give guidance at all. They could just drop the ball and start swinging the ban hammer around.

I fully agree.
We should expect guidance on the 6th.

I don't think so. According to the press release from the agency heads, the hearing was called to clarify jurisdiction and regulatory responsibility between the SEC and CFTC. It has nothing to do with tax guidance. I don't think the IRS has any involvement.

I see 2 outcomes:
1- they say we have to threat tokens like stocks, hence declare every trade as a taxable event.
Then, it's up to lobbies and lawyers to explain the IRS that such "post-event" precision is unfair because it impacts the way people would have traded.
2- they go for a mild approach and say that people should only, for 2017, declare FIAT exchanges (GDAX or exits). Which will make things simpler, especially if they consider your entry point as the point you purchased the BTC (and if you traded this 1BTC and made 5BTC...the 5BTC have the same entry point as the 1st one for instance).
This position would also be reconfirming 2018 position on the "NO-LIKE-KIND", which is clear, and very fair.

Let's hope for guidance! It's the role of the SEC.

No, the SEC regulates securities. They are not a tax authority. The IRS has already said that digital currencies are treated as property for tax purposes. Every trade is a taxable event. Like-kind exchanges already weren't allowed; that categorization became more restrictive with the new tax code but nothing changed vis-a-vis Bitcoin. Declaring only fiat exchange activity doesn't fit within the tax code. They would need to rewrite it to addresses cryptocurrencies for that to become true. That probably won't happen for years.

[infofront]

I'm leaning towards going the like-kind route.

Considering that the law regarding like-kind transfers is crystal clear from 2018 on, they may not try fight with people on it over cryptos, a very murky area, for 2017. Normally if they want to expend a bunch of legal resources it's to set a precedent going forward. In this case, a series of expensive legal battles simply isn't worth it.

Even if it doesn't fly, the IRS won't penalize you too hard, as long as you file the proper paperwork. If they see you tried to do your best, they'll be fair with you if you owe money.

In the end it's all just a gamble.

[thompshma]

Any more clarity on this issue? Specifically for 2017 filing?

[squatter]

Any more clarity on this issue? Specifically for 2017 filing?

I don't think so. We're unlikely to get clarity on the pre-2018 like-kind issue for a number of years, if ever. I've seen several opinions that fall on both sides. Tax advisors seem generally conservative and are mostly opining that like-kind exchanges were never applicable to cryptocurrency in the first place. Some altcoin investors and traders -- naturally, because of the huge difference between short and long term capital gains tax rates -- are trying to argue the opposite.

I am not a lawyer. Personally, I wouldn't risk treating past years cryptocurrency trades as like-kind exchanges.