Wij have determined to retract and revise the position ter our latest blog postbode. Click here to learn more.
Individuals who were quick to recognize the chance introduced by cryptocurrencies like Bitcoin, DogeCoin, and Ethereum have likely railed the market to significant gains spil capital from China and other developing nations have flooded the market. People who bought or mined Bitcoin due to an rente ter the underlying technology or because they witnessed an investment chance may be looking to diversify their cryptocurrency holdings. Ter any case, they may consider switching the overall balance of digital currencies held to increase the likelihood of investment gains or hedge against potential volatility.
For individuals already holding Bitcoin or other digital currency, engaging ter a like-kind exchange under Section 1031 of the U.S. Tax Code can be a viable means of exchanging one type of currency for another. Engaging ter a like-kind exchange can provide tax deferral benefits for transactions that would otherwise generate capital gains taxes and be a means to much-needed diversification amongst the different types of digital currencies that tend to be very volatile. Working with a Bitcoin tax attorney can ensure that you maintain tax compliance even while minimizing the tax influence of a transaction.
What Is a 1031 Exchange and What Are its Benefits?
A 1031 exchange can permit an individual or a business to exchange productive property for like-kind property. Most commonly, individuals will utilize a 1031 transfer to exchange like types of real property. That is, an investor may exchange one type of investment property for another type of investment property. The investor is free to pursue other investment or business goals provided that the property remains an investment property. However, an individual may not exchange investment property for a private residence. Furthermore, there are limitations on “dealers” or other persons treating “stock te trade” leveraging a 1031 exchange.
The main benefit of engaging ter a 1031 exchange is to defer liability on capital gains taxes that would otherwise be incurred at the time of sale. Ter deferring taxes, a property proprietor can reinvest the capital towards other productive uses.
Can A 1031 Exchange Apply to Bitcoin and Digital Currency?
Since a 1031 exchange is typically associated with the sale of property or real property, it may seem somewhat of a spread to consider whether the concept can apply to digital currency. However, the IRS has issued guidance holding that Bitcoin and similar digital currencies will not be treated spil currency for tax purposes. Rather, Bitcoin and similar cryptocurrencies should be considered property for tax purposes.
Spil property, Bitcoin, Ethereum, DogeCoin, and other types of crypto currency are subject to capital gains taxes and related record-keeping requirements. Since Bitcoin is treated spil property and capital gains taxes apply, a 1031 exchange may produce favorable tax benefits if the variations of crypto currencies involved are held to be like zuigeling. See conclusion below:
However, the 1031 exchange is only available when the holder of the digital currency meets certain qualifications.
For one, the holder of the digital currency vereiste hold the capital asset for business or investment purposes. Te addition, the holder of the Bitcoin or other digital currency vereiste not be a dealer or otherwise treat the asset spil inventory or stock ter trade.
Te the setting of an individual trading Bitcoin for Ethereum, a 1031 transfer is likely suitable if the exchange is deemed to be like-kind ter nature. However, if that individual wasgoed a professional currency trader or otherwise ter the business of trading currencies, then it is unlikely that he or she would be able to leverage this type of transfer absent an exception or unusual circumstances.
While it is crystal clear, the IRS excludes assets treated spil inventory or stock te trade from Section 1031 treatment, spil would be the case where a 1031 is attempted by a bitcoin dealer or professional trader, making 1031 effectively unavailable, no explicit guidance has bot issued to clarify whether one digital currency is “like kind” with another. That being said, it remains a question whether Bitcoin is like kleuter with Ethereum, for example, and thus would qualify for a 1031 exchange. Additionally, the receipt of “boot” or other non-like kleintje property, I.E. contant, gold or silver can cause a portion of the build up potentially qualifying for 1031 deferral to be disallowed. While it would seem at present logical that Section 1031 would apply to cryptocurrencies spil they are deemed capital assets, this treatment cannot be confirmed without specific Federal and State guidance on the question of whether one cryptocurrency is like kleintje with another.
Under the Internal Revenue Code certain types of assets do not qualify under the 1031 exchange regulations by being specifically labeled “non-like kind”. At the time of publishing, differing types of virtual currencies have not bot identified spil “non-like kind” or like kleuter with one another. Since no guidance on this subject presently exists, 1031 exchanges of differing types of cryptocurrency, while not outright prohibited, is not ensured to be a tax-free exchange. The conservative treatment would be to not voorkoop section 1031 on an exchange of one digital currency for another. If a taxpayer choses to be aggressive and eis the benefits of 1031 during this type of an exchange, this uncertainty should be adequately disclosed on a terugwedstrijd taking a position that an exchange of one cryptocurrency for another should qualify for 1031 to minimize potential penalties that could apply.
Questions about engaging te a 1031 Digital Currency Exchange?
If you have questions regarding whether a 1031 transfer is adequate for your situation, the tax lawyers and financial professionals of the Tax Law Offices of David W. Klasing may be able to help. To schedule a confidential and diminished rate initial consultation at our Los Angeles or Irvine law offices, please call 800-681-1295 today or schedule online here. Wij can assist with Bitcoin tax programma or appeal an unfavorable Bitcoin tax determination.