Claiming Bitcoin 1031 Exchanges On 2017 Taxes


If you are about to file your tax return, should you claim 1031 treatment for 2017 crypto transactions? If you are cleaning up past tax reporting before the IRS finds you, you might have the same issue for 2016 or even 2015. Claiming 1031 treatment for crypto trades for the past turns out to be a nuanced subject. Until the Trump tax bill killed it, depending on how aggressive you were, and how you could orchestrate it, you could try swapping one digital currency for another. A 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.

Real estate investors do this all the time. Despite a profit on each swap, they avoid tax until they sell for cash years later, paying only one tax, ideally as a long-term capital gain. Whether 1031 (before 2018) applied to cryptocurrency is debatable. Some exchanges of personal property (say a painting or a private plane) have qualified. But exchanges of corporate stock or partnership interests never did. Classically, an exchange involves a simple swap of one property for another between two people. But the majority of exchanges are not simultaneous, but are delayed or “Starker” exchanges (named for the tax case that allowed them). In a delayed exchange, you need a middleman who holds the cash after you “sell” your property and uses it to “buy” the replacement property.

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