No, cryptocurrencies are not considered “like-kind” property and do not qualify for Section 1031 exchanges.
Intangible Assets Ineligible for 1031s Post-TJCA
If you’ve read our guide on how cryptocurrency trades are taxed, you likely already knew the answer to this. Trading one token for another token is always a taxable event, which would of course not be the case if 1031 exchanges were possible.
But as always, looking into the background and history of the topic is helpful.
When the Tax Cuts and Jobs Act was passed in December of 2017, cryptocurrencies had started to become more mainstream. This was all happening right in the middle of the ICO boom and about a month before the huge crash at the beginning of 2018.
Anticipating taxpayers wanting to defer paying tax on their crypto gains, the TCJA specifically restricted Section 1031 exchanges to only be exchanges of real property. Intangible assets such as crypto do not qualify.
That makes things very clear for current and future years. But that TJCA amendment to 1031s was effective 2018. The question that arose was if transactions from previous years could qualify.
On June 18, 2021, the IRS answered this question with ILM (IRS Legal Memo) 202124008.
Different Tokens Are Not “Like-Kind”
The IRS has always defined “like-kind” narrowly. In ILM 202124008, the IRS points to two previous rulings that highlight this perfectly. In Revenue Ruling 82-166, the IRS ruled that gold bullion is not like-kind to silver bullion. It noted that that the investor “was required to recognize gain in part because silver is primarily used as an industrial commodity while gold is primarily used as an investment.”
Similarly, in Revenue Ruling 79-143 the IRS stated that trading different types of gold coins would also not qualify under 1031. This was “because one coin’s value was derived from its collectability while the other’s value was derived from its metal content.”
The IRS has used that same logic when it comes to cryptocurrencies. In the ILM, they only specifically mentioned Bitcoin, Ethereum, and Litecoin (the IRS is usually about five years behind when it comes to cryptocurrency guidance). But in each of those comparisons, they noted the differences in each token. When comparing BTC and ETH, after establishing that the two coins did have some similarities, the IRS noted that: “However, while both cryptocurrencies share similar qualities and uses, they are also fundamentally different from each other because of the difference in overall design, intended use, and actual use.”
That same logic could be and would be applied for trades of any other tokens. But again, this would only affect trades from 2017 and earlier. For 2018 and onward, the TJCA removed all intangible assets from consideration for 1031 exchanges.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
