IRS Bluff About Crypto Like-Kind Exchange Backfired

A recent IRS bluff about like-kind exchange for crypto not only backfired, but also showed their true stance on the treatment. And it could benefit you.

like-kind exchange

This month, an IRS faux pax caused them to reveal their true position on like-kind exchange treatment for cryptocurrencies. Like-kind exchange treatment, Section 1031, eliminated tax on crypto-to-crypto trades prior to 2018. This was a treatment most taxpayers assumed.

Recent Statements About Like-Kind Exchange

At a November 2019 annual national convention of CPAs (AICPA), two guest speakers were associate lawyers at the IRS Office of Chief Counsel. This is the office responsible for all IRS court cases and formulating formal legal opinions by the IRS. One of the lawyers was the author of a recent IRS Revenue Ruling on the treatment of cryptocurrency hard forks and airdrops.

In a Q&A session at the conference, she stated that the Chief Counsel’s office didn’t believe that crypto-to-crypto trades were eligible for like-kind exchange treatment. Never before had the IRS stated any official position on this topic. Immediately, crypto news services broadcasted her comments as the official position of the IRS causing many taxpayers to become alarmed.

like-kind exchange

The Official Stance On Like-Kind Exchange

Within a week, an official spokesperson from the IRS Office of Chief Counsel announced that her comments were not the official position of the IRS. He further explained that the IRS would consider the use of like-kind exchange on a case-by-case basis. All audit cases are handled on a case-by-case basis, therefore, like-kind exchange for cryptos is not a position the IRS is automatically going to attack unless it is reported incorrectly on a case.

She was one of the key lawyers formulating the IRS’s crypto position. She was in a position to clearly know the management position on how to treat like-kind exchange. Her bluff backfired when management had to deny her statement.

This poor bluff forced IRS management to show their hand. It exposed the real IRS position on like-kind exchange for cryptocurrencies. They are not willing to prosecute a case where like-kind exchange is properly reported.

Read More: Biggest IRS Crypto Tax Guidance and What it Means for Crypto Traders

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Photo by Dmitry Demidko on Unsplash

The Bad News and Good News About Like-Kind Exchange

This is good and bad news. This was good news for crypto traders who assumed like-kind exchange treatment was valid. This is bad news because most of these traders assumed they didn’t have to report the trades on their return. This was a mistake. If they didn’t report these trades on Form 8824, they can’t claim like-kind exchange treatment. The IRS would be correct to deny those traders like-kind exchange treatment and subject them large penalties for failing to report income.

From the legal research we have done at Donnelly Tax Law and CryptoTaxAudit, we believe the case for like-kind exchange is quite strong. I believe the case is so strong that the IRS Chief Counsel’s office persuaded the Congress’ Joint Committee on Taxation to change the law to limit like-kind exchange to real estate. Had they not done this, crypto traders would have kept their investments always in crypto and never in fiat, so that they would never have to pay taxes on that money again.

So, this bungled bluff should be an encouragement to traders to amend their 2017 returns to claim like-kind exchange treatment if it would save them significant taxes owed. Those traders who are on the fence as to whether the IRS would contest or not should also be encouraged to claim this option.

©2019

Featured image by André François McKenzie on Unsplash

Want to amend a return?

Here at Donnelly Tax Law we specialize in amending returns specifically dealing with cryptocurrencies and applying the like-kind exchange treatment if it’s beneficial for you (applicable for 2017 and prior years). Schedule a consultation with us to learn more. 

Would you rather do it yourself? Consider our Crypto Tax Fixer Package >> 

Benefit from our other resourceful ebooks:

Basics of Crypto Taxes

Free Download: Crypto Tax Health Check

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