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Author Topic: the 1031 Exchange law  (Read 116 times)
hugeblack
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March 03, 2018, 09:33:09 PM
Merited by botany (2), malevolent (1), mprep (1), vapourminer (1), poptok1 (1), paxmao (1), iasenko (1), Minnie1928 (1)
 #1

an important part of our tax code, allows for investors to defer capital gains taxes, in the event that an investor is selling a property with the direct goal of purchasing a new one. This has been widely used by house flippers and cryptocurrency traders alike.However, the tax bill has removed cryptocurrency from the list of acceptable 1031 references. [1]

To understand the powerful protection a 1031 exchange offers, consider the following example:

  • Assume an investor has $400,000 in gain and also $400,000 in net proceeds after closing. Assuming an investor with a $400,000 capital gain and incurs a tax liability of approximately $140,000 in combined taxes (depreciation recapture, federal capital gain tax, state capital gain tax, and net investment income tax) when the property is sold. Only $260,000 in net equity remains to reinvest in another property.
  • Assuming a 25% down payment and taking on new financing for the purchase with a 75% loan-to-value ratio, the investor would only be able to purchase a $1,040,000 replacement property.[2]
If the same investor chose to exchange, however, he or she would be able to reinvest the entire gross equity of $400,000 in the purchase of $1,600,000 replacement property, assuming the same down payment and loan-to-value ratios.[3]

What is your impression of the new draft resolution?"the 1031 Exchange law"

Sources:
#1 https://71republic.com/2017/12/27/the-free-market-of-cryptocurrency-is-under-attack/
#2 https://apiexchange.com/what-is-a-1031-exchange/
#3 https://apiexchange.com/what-is-a-1031-exchange/


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botany
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March 03, 2018, 09:46:17 PM
 #2

The 1031 rule seems to be very specific to the US. A lot of cryptotraders have benefited from it, but would you call it fair? If a person converts his bitcoins to USD tether, is it a like-for-like exchange? It could be argued that the person has locked in his profits, but is not recognizing capital gains and paying the tax due.
Most countries across the world do not offer similar benefits to cryptocurrency traders. Sure, it will increase the effort required in book keeping and maintaining transaction records, but that is part of the game.
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March 06, 2018, 01:09:10 AM
 #3

The 1031 rule seems to be very specific to the US. A lot of cryptotraders have benefited from it, but would you call it fair? If a person converts his bitcoins to USD tether, is it a like-for-like exchange? It could be argued that the person has locked in his profits, but is not recognizing capital gains and paying the tax due.
Most countries across the world do not offer similar benefits to cryptocurrency traders. Sure, it will increase the effort required in book keeping and maintaining transaction records, but that is part of the game.

I agree that the change to IRC Section 1031 sucks.  It certainly increases the recordkeeping burden, one thing that you may want to discuss with a tax advisor is looking at how different methods of determining cost basis can change your capital gains.  The optimal basis is very specific to a person's trading patterns, so it's something that you'd need to seek individualized advice on.  One thing I am pretty sure of is that cost basis can be specified on a transaction by transaction basis.  This makes that burden previously mentioned even more but could result in significant savings.

Eventually, we need IRS to recognize cryptocurrency as currency.

We will get there.

Best regards,
Ben
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March 08, 2018, 08:38:20 PM
 #4

I thought in the US the law is, that crypto currencies are not regarded as the "same of a kind". This would mean, as soon as you do any exchange to another crypto currency (independant whether it is into Tether or any other crypto currency) you would need to declare your gains. In general I highly recommend to consult a tax expert related to this topic.
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March 08, 2018, 11:59:45 PM
Merited by vapourminer (1)
 #5

I thought in the US the law is, that crypto currencies are not regarded as the "same of a kind". This would mean, as soon as you do any exchange to another crypto currency (independant whether it is into Tether or any other crypto currency) you would need to declare your gains. In general I highly recommend to consult a tax expert related to this topic.

Yes, previously Section 1031 allowed like-kind exchanges in a variety of asset types (though it was somewhat ambiguous about what assets actually qualified for it, investments were generally considered to be among the permissible personal property that was eligible).

However, the Tax Cuts and Jobs Act of 2017 amended that section of the Code and repealed its applicability on anything other than real property (i.e. land, buildings, etc.)

Under this reading of the Code, each individual transaction is evaluated for a capital gain.  This is why it's important to work with a tax professional to determine the best cost basis method for each transaction, this will minimize your taxable gains.

We need cryptocurrency to have legal status as currency.  That would make things so much easier.  Tokens are a different story (with its own set of complexities), but true cryptocurrency should be treated the same as Yen, Euro, or Dollars, etc.

Best,
Ben

[Not tax or any other kind of advice.  Ask your doctor if cryptocurrency is right for you.  I am not your accountant, go talk to him or her.]
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