Equal Exchange of Cryptocurrencies – Recent IRS Guidelines | Freeman law

In a recently published Chief Council Advisory, the IRS noted that certain cryptocurrencies did not qualify as equivalent exchanges under Section 1031 prior to the Tax Cuts & Jobs Act of 2017. Litecoin provides some insight into the current thinking of the IRS on the matter.

The judgment posed the following question: If an exchange of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin or (iii) Ether for Litecoin was completed before January 1, 2018, it is deemed to be a similar exchange under Section 1031 of the Code?

The judgment makes the following conclusion: no. If an exchange of (i) Bitcoin for Ether, (ii) Bitcoin for Litecoin or (iii) Ether for Litecoin is completed before January 1, 2018, no similar type of exchange will apply in accordance with Section 1031 of the Code.

Virtual currency background

The IRS defines “virtual currency” as a digital representation of value that acts as a medium of exchange, unit of account, or store of value that is not a representation of the US dollar or any foreign currency. Note 2014-21; Rev. Rule. 2019-24. Virtual currency that has an equivalent in real currency or acts as a substitute for real currency, such as Bitcoin, is called “convertible” virtual currency and is considered property for federal income tax purposes. Note 2014-21.

Bitcoin, Ether, and Litecoin are all forms of cryptocurrency, a subset of virtual currency that uses cryptography to secure transactions that are digitally recorded in a distributed ledger, such as a blockchain. Rev. Rule. 2019-24 at 2. Distributed ledger technology uses independent digital systems to record, share and synchronize transactions. Cryptocurrencies can be used as a means of payment or for investment or other purposes.

Cryptocurrency exchanges are digital platforms that allow users to swap one cryptocurrency for another cryptocurrency as well as fiat currencies such as the US dollar. Major cryptocurrencies like Bitcoin and Ether can usually be traded against any other cryptocurrency and vice versa. However, some cryptocurrencies on a cryptocurrency exchange can only be traded against a limited number of other cryptocurrencies and not against fiat currencies at all. In 2017 there were more than 1,000 different cryptocurrencies.

Exchange of like-minded people

Section 1031 (a) (1) of the Code provides that when property is exchanged for productive use in a trade or business, or for investments, no gain or loss is recorded if this property is exchanged exclusively for property of the same type held either for productive use in a trade or company, or for investment. The non-crediting of profits or losses according to § 1031 should apply to transactions in which the economic situation of the taxpayer after the exchange is essentially the same as before the transaction. H. Rep. 704, 73d Kong., 2d Sess. (1934), 1939-1 CB (Part 2) 554, 564. The Tax Cuts and Jobs Act, PL 115-97, amended Section 1031 to restrict the treatment of similar exchanges to real estate exchanges after December 31, 2017 . Before 2018, Section 1031 also applied to the exchange of personal property.

Trees. Registration number. Section 1.1031 (a) -1 (b) defines “same type” as the type or character of the property rather than its grade or quality. One type or class of goods cannot be exchanged for goods of another type or class. For example, an investor who exchanged gold bars for silver bars had to partially acknowledge a profit because silver is mainly used as an industrial commodity while gold is mainly used as an investment. Rev. Rule. 82-166. Likewise, an investor who exchanged one gold coin for another gold coin had to acknowledge a profit, since the value of one coin was derived from its collectibility while the value of the other was derived from its metal content. Rev. Rule. 79-143.

The rationale of the IRS:

The IRS has set out the following analysis in relation to the cryptocurrencies at issue in the judgment. To ensure that the reader is getting firsthand the current thinking of the IRS on the matter, we will present the relevant analysis from the following verdict:


In 2016 and 2017, Bitcoin, and to a lesser extent Ether, held a special position in the cryptocurrency market, as the vast majority of the cryptocurrency-to-fiat trading pairs offered by cryptocurrency exchanges included either Bitcoin or Ether as part of the pair. In other words, a person who wants to invest in a cryptocurrency other than Bitcoin or Ether, such as Litecoin, would generally need to purchase either Bitcoin or Ether first. Likewise, a person who wishes to liquidate their holdings in a cryptocurrency other than Bitcoin or Ether such as Litecoin would generally have to exchange these holdings for Bitcoin or Ether first. In contrast, the availability of Litecoin trading pairs was much more limited at the time.

Thus, in 2016 and 2017, Bitcoin and Ether played a fundamentally different role than other cryptocurrencies within the broader cryptocurrency market. In contrast to other cryptocurrencies, Bitcoin and Ether acted as entry and exit points for investments and transactions in other cryptocurrencies. Because of this difference, Bitcoin and Ether differed from Litecoin in type and character. Therefore, Bitcoin and Litecoin (BTC / LTC) are not considered to be like property within the meaning of Section 1031; still Ether and Litecoin (ETH / LTC).


As discussed above, Bitcoin and Ether shared a special role in the cryptocurrency market that fundamentally set them apart from Litecoin in the relevant years. However, although both cryptocurrencies have similar qualities and uses, they are also fundamentally different from each other due to the difference in overall design, intended use, and actual use. The Bitcoin network is intended to act as a payment network for which Bitcoin acts as a unit of payment. The Ethereum blockchain, on the other hand, should act as a payment network and platform for the operation of smart contracts and other applications, with Ether acting as “fuel” for these functions. Although both Ether and Bitcoin can be used for payments, Ether distinguishes the additional functionality of Ether in both nature and character. Therefore, Bitcoin and Ether are not considered to be like property under Section 1031.

As can be seen, the IRS places great emphasis on the functionality of the cryptocurrency in question in a proposed exchange. The service characterizes Bitcoin and Ether, for example, as “entry and exit for investments and transactions in other crypto currencies”. Litecoin, on the other hand, played a “fundamentally different role” than Bitcoin and Ether and differed in both “nature and character”. Viewed through this analytical prism, the service came to the conclusion that an exchange of these cryptocurrencies did not lead to a similar exchange.

The IRS also found that Ether’s “additional functionality” caused it to be fundamentally different from Bitcoin in nature and character, leading the IRS to determine that “Bitcoin and Ether are not considered to be like property under Section 1031” .

Taxpayers with cryptocurrency holdings should seek advice and advice from an experienced and certified tax attorney regarding cryptocurrency transactions. Cryptocurrency activities and transactions offer many opportunities for tax planning and, unfortunately, tax traps as well. Given the IRS’s continued focus on cryptocurrency tax reporting, the stakes can be high for many.

[View source.]

Comments are closed.