cryptocurrency, bitcoin, ethereum, crypto
The current version of the Senate’s proposed tax bill seems to take a shot at crypto.
Section 1031(a) of the Tax Code exempts “like-kind” exchanges of property from recognizing gain or loss if that property is used for trade, business, or investment purposes.
“Like-kind exchange” means you’re exchange the same type of asset: real estate for real estate, for example.
“Recognition” (in simple terms) means that tax consequences are triggered on a certain amount of gain or loss. Think about it like this: if a stock you own goes up but you don’t sell the stock, you’re not taxed on the gain yet. Once you sell it, you’re taxed on the gain. Aka, the gain is “recognized.”
The IRS has said crypto constitutes property for tax purposes. And because Section 1031 of the Tax Code applies to “property held for productive use in a trade or business or for investment,” it applies to crypto.
In practice, this means that if you own one type of cryptocurrency that has increased in value (by, oh, say 1800% in the past year, because that’s totally normal) and you exchange it for another cryptocurrency, you will not recognize that gain. You will not have to pay taxes immediately.
This is called "tax deferral." You still have to pay the tax. Just not right now.
This is a good thing. Why? Because you get to use the extra $$$ that would have been paid in tax until that tax payment day comes. That is, you can continue to invest with it. It's like an interest-free loan from the IRS.
Here’s the Rub:
Section 13303 of the Senate’s proposed tax bill changes the language of Section 1031(a) by replacing all instances of “property” with “real property.”
Since "real" property refers to immovable, tangible property like real estate, crypto doesn’t fit into the Section if the changes are adopted.
This means if you exchange one type of crypto for another, you would have to recognize any gain immediately, because it’s not real property. Bad news bears.
Whether the Senate intended to target cryptos is unknown at the moment. It could, for example, just be targeted at stock investors.
There is one possible upside to the proposal. If the Senate did intend to exclude property from this tax exemption, then it’s a further sign they recognize cryptocurrency as a type of property.
All first-year law students have to take property law. The class focuses on real property, and some schools may even take a quick jaunt into intellectual property.
But maybe ten years from now those first-year law students will have to spend a week or two studying digital property law.
Thoughts? Comments? Questions? Let us know below.