Was Your Crypto Currency Swap in 2017 Tax Free? Tax Expert Rob Wood Says “Maybe”
The Trump tax bill rewrote Section 1031 of the Internal Revenue Code relating to tax-free exchanges, limiting them to real estate. But what about transactions that took place in 2017, before the effective date of the tax law change? Can they qualify as tax-free exchanges? Tax lawyer Rob Wood explains that there is some debate on the subject. He explains the issues in this report. He also discusses the subject in his article, “Biggest Crypto Tax Debate Is Not What You Think: Expert Take.”
Wood says that there is not a uniform answer to question regarding Section 1031 treatment for crypto currency swaps. Wood notes that a lot of investors seem to be claiming Section 1031 treatment for exchanges in 2016 and 2017. The concern may be the nature of the transaction. It should be a swap, not a sale. With real estate, there will be two parties involved, and perhaps three, in the case of a Starker exchange. The use of an intermediary (Starker) assures that the parties exchanging properties never end up handling money, something that would rule out 1031 treatment.
Looking at the model for the tax-free exchange of real estate properties, Wood says that it is possible to structure a cryptocurrency exchange in such a way that it would qualify under the old version of Section 1031. Wood’s caveat is that a transaction, to qualify, must follow the correct steps and be properly documented. Some people have an informal view of 1031, believing that they can sell one currency, buy another with the proceeds, and qualify for tax-free exchange treatment. Wood suggests that this sort of approach will not work.
Another issue is the nature of the tax return. Wood points out that reporting is required on IRS Form 8824. The taxpayer must report, in effect, that “I swapped A for B, and my tax basis in A is now my tax basis in B.” You file Form 8824 with your tax return. Wood’s opinion is that smart crypto investors will fill out and file the forms with their tax returns. There may be questions about “how you fill out those forms” and how much detail should be provided, but the forms should be filed. Failing to file the forms is a big mistake.
Wood says there is disagreement about whether the change in the law will make it harder for crypto investors to claim tax-free exchange status on crypto swaps made in 2016 or 2017. The answer is not presently clear. However, taxpayers who want to use Section 1031 should do it carefully.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.