IRS Recent Guidance on Crypto Assets

Curious about the tax consequences of certain crypto assets? Associate Jerry James explains the IRS’ recent guidance on the topic:

As the global cryptocurrency market capitalization surpasses its current value of $2.75 trillion, the IRS has released some guidance—though limited—on the tax consequences of certain crypto assets.

Under Legislation known as the Infrastructure Investment and Jobs Act, P.L. 117-58, enacted in November, 2021, the IRS carved-out some provisions related to crypto assets including that Form 1099-B, Proceeds from a Broker and Barter Transaction, which can be found here and the instructions here, must be filed in transactions facilitated by a broker (i.e. someone acting on behalf of another).

The IRS released its IRS Legal Memorandum (ILM) 202124008  on June 18, 2021, which addressed the treatment of 1031 exchanges of bitcoin (BTC) for Ether (ETH), bitcoin for Litecoin (LTC), and Ether for Litecoin. The Law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97  limited the applicability of IRC § 1031 like-kind exchange treatment to transactions involving real property beginning January 1, 2018.

The IRS takes the position that one kind or class of property may not be exchanged for property of a different kind or class, without the recognition of gain. For example, a transaction involving an exchange of gold bullion for silver bullion would be a taxable event. The IRS steadfastly applies that similar analysis in the cryptocurrency world.

As such, with (1) the TCJA limiting 1031 exchanges to transactions involving real property and (2) treating BTC and ETH as different classes or kinds of property, mostly likely would lead to any exchanges of BTC for ETH, BTC for LTC or ETH for LTC as a taxable event.

The guidance, nonetheless, is limited merely to the transactions discussed above. However, given the amendment to IRC § 1031 under the TCJA, one can presume that exchanges of other crypto assets may engender a taxable event.