Between 2014 and 2017, some taxpayers and tax preparers took the position that trading one cryptocurrency for another qualified as a like-kind exchange under §1031, deferring any capital gains. The IRS has never agreed with this position, and the Tax Cuts and Jobs Act of 2017 eliminated any remaining argument by restricting §1031 to real property.

The Argument

The like-kind exchange theory was based on the premise that cryptocurrencies are similar enough in nature to qualify as "like-kind" property under pre-2018 §1031. Proponents argued that Bitcoin and Ethereum, for example, serve similar functions as digital stores of value and mediums of exchange, making them like-kind properties. Under this theory, trading Bitcoin for Ethereum would defer any gain until the Ethereum was ultimately sold for fiat currency.

Why It Fails

The IRS has stated in its FAQs that cryptocurrency exchanges do not qualify for §1031 treatment. Even before the 2017 law change, the argument was weak. Like-kind exchange regulations require that properties be of the same nature or character. The IRS takes the position that different cryptocurrencies — with different protocols, functions, and use cases — are not of the same nature. The courts have not ruled on this specific issue for crypto, but the IRS's position is clear and aggressive.

Post-2017: No Argument at All

The Tax Cuts and Jobs Act amended §1031 to apply only to real property, effective January 1, 2018. From 2018 forward, there is zero legal basis for treating crypto-to-crypto trades as like-kind exchanges. Any return filed with this position for tax years 2018 or later is incorrect on its face.

Returns Already Filed

If you filed returns for 2014-2017 using like-kind exchange treatment for crypto trades, the IRS may challenge those returns. The statute of limitations for assessment is generally three years from filing, but extends to six years if the unreported income exceeds 25% of gross income reported on the return. In cases involving fraud, there is no statute of limitations.

Correcting the Record

If your prior returns relied on like-kind exchange treatment for crypto trades, filing amended returns may be advisable — particularly if the unreported gains are substantial. Attorney Darrin T. Mish evaluates the risk, calculates the exposure, and implements the correction strategy that produces the best outcome. Free consultation.