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Can Like Kind Exchange Be Used for Crypto?

Crypto tax software by TokenTax: How like kind exchange works, and when you may — or may not — be able to use it for cryptocurrency tax calculation.

Update: IRS representatives have recently made comments saying that like-kind is not intended for crypto. However, one such IRS representative later clarified that the IRS does not have a blanket policy to disallow past years of like kind transactions, and that instead the ruling will be determined per taxpayer on a case by case basis.

How crypto like kind exchange works

Like kind exchange, also known as 1031 Exchange (referring to Section 1031 of the IRS code), is a tax treatment in the United States where you can dispose of a capital asset and acquire another similar asset without generating a taxable event. This means that the cost basis is transferred over between assets without recognizing any gains or losses, thus deferring capital gains (or losses).

This means that if you buy BTC with fiat and then trade it for altcoins, you don’t recognize any capital gains tax when selling BTC to buy altcoins. You only recognize the capital gains when you cash out the crypto for fiat. You will ultimately pay the same capital gains tax, but gains will be deferred and only paid when you trade to fiat, which may defer your gains to long term

Can I file crypto tax with like kind exchange?

Like kind exchange is only possible for real estate as of the 2018 tax year, meaning that like kind exchange cannot be used for crypto. Before 2018, it depends. Filing like kind for crypto is an aggressive strategy, and many experts do not advise it.

The IRS has not given guidance as to whether like kind exchange was allowed, so some people have filed their crypto taxes like kind. It's unclear, however, whether different cryptocurrencies are qualified as similar assets.

Was like kind exchange allowed for crypto before 2018?

While it’s now very clear cut that only real estate can be used in like kind transactions, in 2017 and before, it was generally unclear as to whether like kind exchange was allowed for cryptocurrency. 

For previous tax years, there has been no specific IRS guidance on whether like kind exchange is allowed, so a few taxpayers have elected to calculate their crypto with like kind with the idea that different cryptocurrencies are similar assets. 

Furthermore, it’s unclear whether separate cryptocurrencies “substantially similar” enough to qualify for like kind exchange. It is possible that the IRS may issue guidance that states that like kind was or wasn’t allowed, the latter possibly resulting in taxpayers needing to amend their return. 

How to file crypto like kind exchange 

If you’re filing for 2017 and before and you recognize the possible risks with filing like kind, then you use Form 8824 to file your digital currency like-kind transactions. Keep in mind that like kind is not allowed for crypto in 2018 and beyond because of changes in tax code. 

TokenTax by default does not do like kind calculation. A special kind of crypto tax calculation is required for like kind exchange. We help our VIP clients calculate their crypto in like kind if they deem it acceptable to do so in discussing with a tax professional. 

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