IRS Clarifies Crypto Tax Treatment of Like-Kind Exchange, Airdrops, and FBAR Reporting
Key individuals and regulators in the crypto tax space clarified a variety of topics yesterday (Nov. 13, 2019) at the AICPA national tax conference in Washington, DC. Topics of clarification included the tax treatment around 1031 Like-Kind exchange, airdrops, specific identification, and FBAR reporting requirements. These were all areas that crypto investors and crypto tax professionals had questions on after the newly issued IRS guidance came out in October of 2019.
Like Kind Exchange Pre 2018
Like-kind exchange treatment allows a taxpayer to defer the capital gains on real property-to-property transactions. This tax deferral technique is commonly used in the world of real-estate investing and many crypto tax professionals prior to 2018 believed it may also apply to cryptocurrencies as they are also treated as property in the eyes of the IRS.
The Tax Cuts and Jobs act which was set forth in 2018 eliminated the possibility that like-kind exchange could be applied to cryptocurrencies and narrowed the scope to “real property” only. However, it left the door open to the question of whether or not Like-Kind exchange treatment could still be used in the years prior to 2018 and prior to TCJA.
At the AICPA event, Suzanne Sinno (General Attorney, IRS Office of Chief Counsel) clarified that like-kind exchange for cryptocurrency was never allowed—even pre 2018.
On November 15th, 2019, two days after the AICPA event, Christopher Wrobel (Special Counsel to the Associate Chief Counsel, IRS) also discussed like-kind exchange and stated that while like-kind exchanges are disallowed for cryptocurrency starting in 2018, for pre-2018 transactions, they remain a gray area and will be decided on a case-by-case basis. The vast majority of tax professionals that we work closely with here at CryptoTrader.Tax who are experts in crypto tax enforcement say that the conservative approach is to not be doing like-kind exchange pre 2018. Please consult your own tax advisor on these matters.
You can use CryptoTrader.Tax to automatically calculate your capital gains and losses without like-kind treatment. Like-kind treatment is not supported.
FBAR reporting NOT required
Carole House (Cyber and Emerging Tech Policy Specialist, Financial Crimes Enforcement Network) of FinCEN clarified at the panel on Nov. 13th, 2019 that FBAR (FinCEN 114) reporting for cryptocurrency held on foreign exchanges is NOT required. This is a big relief for crypto investors holding significant amount of assets on foreign exchanges like Binance. These investors do not need to file an FBAR.
It is still not confirmed whether FATCA (IRS Form 8938) is required or not for foreign reporting. For updates on the latest crypto tax news, follow @CryptoTraderTax on Twitter.
As a result of the recent IRS crypto tax guidance released in October, tax treatment of cryptocurrencies received from airdrop events were further brought into question.
Christopher Wrobel clarified that the new guidance around airdrops only intended to cover new coins received AFTER a hard fork event. Coins received after a hard fork are to be treated as ordinary income at the fair market value of the coin at the time it was received.
This clarification means that coins that are airdropped to consumers for marketing purposes are still in the gray area as to whether they are to be treated as ordinary income.
You can learn more about how airdrops and hard forks are taxed here.
First-in first-out is the default accounting method to use for calculating capital gains and losses across the sale or disposition of your crypto. However, the recent IRS guidance that came out in Oct. 2019 mentioned that specific identification methods ARE allowable if you can specifically identify your crypto assets. The following is taken from the Oct. 2019 guidance:
“A37. You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address. This information must show (1) the date and time each unit was acquired, (2) your basis and the fair market value of each unit at the time it was acquired, (3) the date and time each unit was sold, exchanged, or otherwise disposed of, and (4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”
Suzanne Sinno further confirmed that specific identification methods like LIFO (last-in first-out) and HIFO (highest-in first-out) are allowed if one can specifically identify their crypto. This is great news for cryptocurrency traders as these techniques can help minimize your crypto tax liability by reducing your overall gains.
You can use crypto tax software like CryptoTrader.Tax to automatically apply HIFO or LIFO calculations to your capital gains reports. CryptoTrader.Tax includes a complete audit trail for your records detailing the specific identification of each unit of cryptocurrency and thus helps you minimize your capital gains liability.
Learn More About Crypto Taxes
You can learn more about cryptocurrency taxes and exactly how everything is treated here: The Complete 2019 Guide to Cryptocurrency Taxes.
Disclaimer - This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own crypto tax professional, CPA or tax attorney on how you should treat taxation of digital currencies.