Effective with the new tax bill that was signed into law just before the turn of the new year, all cryptocurrency trades have become a taxable event, including swapping one cryptocurrency for another. Cryptocurrency is a digital or virtual currency that works as a medium of exchange. While many people are most familiar with Bitcoin, there are over 1,300 different cryptocurrencies, and most are unavailable to purchase with the U.S. dollar.
Those traders who wish to purchase many of these cryptocurrencies must first turn their U.S. dollars into one of more well-known and established cryptocurrencies such as Bitcoin or Ethereum. Prior to the enactment of the new tax bill, many traders relied on the Section 1031 of the tax code, which enabled them to swap one cryptocurrency for another in a like-kind exchange, which did not trigger a taxable event. The new law marks a significant departure from current law by closing the 1031 tax loophole. The new tax law now limits the 1031 exemption to real property, whereas before it was just property, a category that included cryptocurrencies.
See related blog: Bitcoin Traders Are in the IRS Crosshairs.
There was much debate over whether this type of cryptocurrency transaction would qualify under 1031, but the new tax law turns the gray to black. Now, all cryptocurrency trades will be taxed at the time they are executed. What remains to be seen is whether cryptocurrency traders will take the change to heart and report all their cryptocurrency realized gain and losses.
For more information related to cryptocurrency, or other tax issues, contact Denny Murphy at 440-449-6800, or email Denny.