Bitcoin and other cryptocurrencies are becoming a common hobby and even a means of investment income. Until recently, many citizens and their accountants debated whether exchange of crytocurrencies even needed to be reported. A wave of new charges have settled that issue, leaving people to wonder instead how to report these transactions. The answer? It is complicated, and clients may even need a cryptocurrency tax advisor.
Bitcoin 1031 Exchanges: Gone With 2017
Until recently, bitcoin and other cryptocurrency exchanges were often claimed as a 1031 exchange according to most cryptocurrency tax adviser guides, also known as a “like-kind exchange.” Although swaps and trades of assets are taxable, this is generally untrue if you are trading like items according to Section 1031 of the tax code. Real estate is the best example of this law.
1031 or like-kind exchange is a swap of one business or investment asset for another, but most swaps are taxable. Section 1031 is an exception to the rule that swaps are fully taxable. If you qualify, your tax basis stays the same, so your investment continues to grow tax-deferred. If you qualify, there is no limit on how many times or how frequently you can do a 1031. You can also do what is called a “starker,” or delayed, exchange in which a middle man or business holds the profits from a sale until they can be put into a purchase.
Bitcoin and Cryptocurrency Exchanges No Longer Covered
For several years, the laws governing claiming cryptocurrency sales were very ambiguous. As a result, many people have used the 1031 loophole to reduce the amount of bitcoin income that is taxable. Trump’s recent tax reform has made it clear that this will not be okay in 2018 or for the foreseeable future.
How exactly are these exchanges to be reported? In general, most experts recommend treating them like stocks and bonds. The IRS may give more clarification on this in the future, as there are still many unanswered questions.
If your clients have cryptocurrency profits in 2018 and beyond, it is important to know how to legally report them. In many cases, a cryptocurrency tax adviser may be necessary to ensure that they are full compliance without paying more than is necessary.
