Crypto
Coin Head, [Aug 23, 2017, 9:17 PM]:
...
Privileged and Confidential
Dear [Coin Head],
I took your issues into consideration and did some research on the issue of “like-kind”. As you are aware “virtual currency” is a new concept across the globe, including the IRS. In 2014, IRS issued guidance that “virtual currency” is to be treated as property for US income tax purposes and that all principals applicable to taxation of property apply to “virtual currency”. Following the 2014 guidance, the AICPA requested clarity on various issues anticipated in reporting transactions of “virtual currency”. Part of the request included exchanges under section 1031 like kind exchange rules.
The Code and the Regulations define like kind as property with reference to the nature or character of the property and not its grade or quality. This was the basis used by the Service in its various Revenue Rulings addressing like kind exchange as applied to gold. For example, in Rev. Rul. 76-214, the Service determined that Mexican gold coin and Austrian gold coin qualified as like kind property. Both coins were no longer in circulation as mediums of exchange in their respective countries and were not considered currency or money. The differences between the gold coins minted by one country and gold coins minted by another country, where such coins are not used as a circulating medium of exchange, are primarily of size, shape, and amount of gold content. The nature or character of the gold coins, however, were deemed to be the same, and thus they qualified as “like kind” property. In Rev. Ruling 82-96, the Service ruled that exchange of gold bullion for Canadian Maple Leaf gold coins (legal tender in Canada) qualified as a like kind exchange because both the coins were bought and sold for their gold content and thus both qualified as bullion-type coins.
On the other hand, Rev. Rul. 79-143 held that U.S. $20 gold coins (numismatic-type coins) for South African Krugerrand gold coins (bullion-type coins) did not qualify as like kind property (gold) because the two coins represented totally different types of underlying investment, and therefore were not the same nature or character. The bullion-type coins, unlike the numismatic-type coins, represent an investment in gold on world markets rather than in the coins themselves. The distinction made in Rev. Rul. 79-143 was based on the type of investment the coins represented. The ruling analogies to the exchange of different sex livestock where it was found that livestock of different sex were investment of different types of property.
As you can see from the above decisions, the area of like kind does not have clear cut definitions. In applying the above distinctions to “virtual currency”, to determine whether two alternative “coins” qualify as like kind property we must look to the nature or character of the property and not to its grade or quality. Here, “virtual currency” of various kinds are blockchain based exchange of binary digits. Similar to the coins minted by Mexico and Australia, the “coins” here are not considered currency for U.S. purposes, the coins are treated the same for investment purposes, and are intended to be of the same nature investment holding. Here, all investments are held for the same purpose, unlike the case dealing with livestock and numismatic vs. bullion coins. The main difference in the coins is the value of the coin on the world market at a specific time.
On the other hand, the Service may argue that each coin is based on its unique set of properties and algorithm and thus is not of the same nature or character and carry different investment risk.
The argument can be made on both ends that all crypto currency is like kind. This is an area that has not been tested. Nor, is there any precedent to provide guidance on how to treat the exchanges for 1031 purposes. All 1031 exchanges are disclosed on Form 8824. In the event that the Service determines that crypto currency qualifies for 1031 you must file amended returns to claim the benefit of
the 1031 if you did not do so previously. The statute of limitations for refund and for filing of amended returns may lapse and you may be without any remedy. To protect your right, you may file a protective claim on the issue.
On the other hand, if you claim that 1031 exchange is applicable because the “coins” are like kind based on the principals above, you may claim the deferred gain benefit and properly disclose the transaction on Form 8824. In the event the Service does not agree you will be responsible for tax and interest. However, due to lack of guidance by the Service in this area, you can successfully argue for abatement of any penalties.
If you like to request a private letter ruling, this would cover your position 100 percent as applied to the facts disclosed. The Service may deny issuing a ruling if the Service is working on regulations or other published guidance in the area.
I hope that addresses your questions. Lets plan on a conference call once you determine how you like to move forward.