The U.S. Internal Revenue Service (IRS) has cleared up some confusion about how cryptocurrency transactions are taxed, particularly regarding like-kind exchanges and promotional airdrops. As the tax agency intensifies its enforcement efforts, more people are seeking the best tax software to help them.
Also read: Tax Guide: What Crypto Owners Should Know
Pre-2018 Like-Kind Exchanges
The latest IRS cryptocurrency tax guidance has raised a number of questions. Besides issues surrounding hard forks and airdrops, Bloomberg reported that tax practitioners had questions regarding how cryptocurrency transactions made before 2018 are taxed. This was due to the tax overhaul in December 2017 which enables taxpayers to postpone paying tax on the gain of a sale if the proceeds are reinvested in similar property.
Suzanne Sinno is an attorney in the IRS Office of Associate Chief Counsel (Income Tax and Accounting) who worked on the new crypto guidance. She explained at the American Institute of CPAs conference in Washington, D.C., on Wednesday that taxes on like-kind exchanges of cryptocurrency cannot be deferred, even for transactions that occurred before 2018. She clarified:
It is the agency’s position that like-kind exchange principles were never applicable to cryptocurrency.
The confusion concerns Section 1031 like-kind exchanges, which beginning Dec. 31, 2017, “applies only to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale,” the IRS website explains. “Before the law change, section 1031 also applied to certain exchanges of personal or intangible property.”
Another ambiguous area emerging from the new IRS crypto tax guidance is promotional airdrops where companies give away free coins for marketing purposes.