Crypto Like-Kind Exchanges

As April 15th rapidly approaches, articles covering the many nuances of crypto tax treatment become more and more important:

One important exception to the general rule that exchanges of property are immediately taxable is the “like-kind” exchange rule under Section 1031 of the Code.

Under Section 1031, no gain or loss is recognized if property held for investment (or for productive use in a trade or business) is exchanged solely for property of like kind.

For crypto traders, the ability to use like-kind exchange rules to avoid U.S. tax on their trades is a bit of a “good news/bad news” story.

First, the bad news. Buried deep in the massive tax bill enacted at the end of 2017 was a provision that limits like-kind exchanges to real estate transactions, effective after December 31, 2017.

As a result, there seems to be zero ability for crypto traders to claim that their coin trades undertaken after 2017 qualify as Section 1031 like-kind exchanges.

Trades before 2018

Crypto traders still may be able to argue that their transactions undertaken in 2017 and prior years were not taxable under the Section 1031 like-kind exchange rules. But, the application of the like-kind exchange rules to crypto transactions is far from certain.

Delta Replaces Frequent Flyer Program With Ether

Spectacular leap forward in crypto adoption:

Delta Air Lines will be the first major global carrier to adopt digital currency in lieu of its existing loyalty program, effective January 1, 2019. It will transition from having its members accrue SkyMiles, which are currently awarded based on dollars spent on the ticket fare, to earning Ethereum, which is one of the many types of cryptocurrencies currently in the market.

Happy Easter, everyone!
(And April Fool’s.)

The ABA on Hard-Fork Taxation

An undercovered topic in crypto has been the tax treatment for hard forks, like the Bitcoin / Bitcoin Cash split in 2017.  With April 15 looming on the horizon, the IRS desperately needs to clarify its treatment of hard forks.  Though I am not a tax lawyer, it has long seemed to me that two sensible approaches exist:

(1) Treat the received crypto as dividends.  This is the safest approach for taxpayers because you pay tax on the received coins effective when you received them, so the IRS can’t possibly complain that you have underpaid.  But there are multiple problems.  First, it is difficult to assign a value to newly forked coins.  Their liquidity is usually small because few exchanges immediately support them, and their price therefore fluctuates wildly.  Second, the recipient may not actually have access to the forked coins, but under the doctrine of constructive receipt, the IRS may still hold them liable for the taxes on it. (  Third, believe it or not, the goal is not to pay the IRS the most you possibly can, but rather the amount you actually owe under the law.

(2) Treat the received crypto as an asset with a basis of $0 on the day of the fork, and pay capital gains under the normal rules on the day you dispose of it.  This resolves the problems above.  By the time someone sells the crypto, they are satisfied that liquidity is sufficient and, in any case, they receive a clear, unambiguous amount in return.  They never need to pay taxes for property they don’t control.  And they don’t pay early.

The second approach has recently been suggested to the IRS by the ABA Section on Taxation.  (

SEC Statement on Exchanges

The SEC has put out a new statement on exchanges, indicating that they are not being left out of the Commission’s big enforcement push:

Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”).  The platforms often claim to give investors the ability to quickly buy and sell digital assets.  Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.

A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.  The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.


The SEC also invites companies developing platforms to retain counsel and engage proactively with SEC staff:

We encourage market participants who are employing new technologies to develop trading platforms to consult with legal counsel to aid in their analysis of federal securities law issues and to contact SEC staff, as needed, for assistance in analyzing the application of the federal securities laws.In particular, staff providing assistance on these matters can be reached at



Germany Will Treat Cryptocurrency As Money

Treating cryptocurrency as money is an important step in its broad acceptance as another unit of exchange. No one will buy a cup of coffee or much else with cryptocurrency if they have to report it on their tax return at the end of the year:

Germany won’t tax bitcoin users for using the cryptocurrency as a means of payment, the Ministry of Finance has said.

The guidance, published Tuesday, sets Germany apart from the U.S., where the Internal Revenue Service treats bitcoin as property for tax purposes – which means that if an American buys a cup of coffee with bitcoin, it’s technically considered a sale of property and potentially subject to capital gains tax.

Bitcoin and the U.S. Marshals

An interesting look at the seizure and sale of Bitcoin and other cryptocurrency by the U.S. Government, including some legal twists and turns:

The U.S. Marshals Service is the oldest law-enforcement agency in the country, counting gunslingers like Wyatt Earp and Wild Bill Hickok among its alumni. More recently, TV and movies have familiarized many Americans with its role transporting prisoners and tracking dangerous fugitives. Far fewer people know the marshals sell Bitcoin.

A decades-old law gives the Marshals Service, which is part of the Department of Justice, primary responsibility for disposing of items seized by other federal law-enforcement agencies. That’s why you can visit the marshals’ website and ogle boats, cars, planes, wristwatches, and other ill-gotten gains snatched by the FBI and other agencies, all available at public auction. The seizure process, known as forfeiture (see sidebar), became more commonplace and controversial in the 1980s after Congress made it easier for federal officials to sell assets tied to drug crimes.

. . . .

Local authorities are dealing with comparable headaches. “We had a good, old-fashioned kidnapping and robbery where they put the guy into what he thought was an Uber and then held him at gunpoint for $1.8 million worth of [digital currency] Ethereum,” forcing him to give them his private key, says Brenda Fischer, who leads the cyber unit of the Manhattan District Attorney’s office. The DA’s office recovered the funds but is now coping with a conundrum: The robber converted the Ethereum to Bitcoin, whose price rose significantly after the theft—raising novel legal questions over who should get the surplus windfall.


Wyoming Passes Token Exemptions

Really interesting how Wyoming is taking the lead on deregulating tokens:

House Bill (HB) 70, which on Monday passed the House 60 to 0 and will now head to the Senate, explicitly exempts utility tokens from state securities regulations, a key factor in attracting initial coin offering (ICO) launches to the state.