Bitcoin, a type of cryptocurrency, has become a hot topic in the past few months. Sequence Media Group has produced videos by contributors Rudy Miller of The Miller Group discussing Bitcoin as an investment and Rob Wood of Wood LLP explaining tax consequences of Bitcoin transactions. In light of the possible passage of a tax bill in Congress before the end of the year, Rob Wood returns to discuss what effect a new tax law might have on tax-free exchanges involving Bitcoin, a topic he has also discussed in his Forbes article, “Tax Bills Doom Tax-Free 1031 Exchanges Of Cryptocurrency.”
Wood first explains that tax-free exchanges are presently possible under Section 1031 of the Tax Code. Section 1031 is well-known to people who hold real estate for investment purposes. What is usually involved is swapping one piece of real property for another one. If the property qualifies and the transaction is structured properly, the swap is tax-free. Wood notes that most transactions involve commercial real estate. Mr. Trump and his company have done 1031 exchanges. Wood says that a 1031 exchange is essentially a tax deferral transaction. The transaction does not eliminate the obligation to pay tax; it merely permits the owner of real estate to exchange one piece of property for another without having to pay tax at the time.
The big question, then, is whether Section 1031 applies to cryptocurrency. “Truthfully,” Wood says, “no one seems to know the answer to that.” There are things that presently do not qualify. Stock in a corporation does not qualify under Section 1031. (Although, Wood notes, in a tax-free corporate reorganization where one company acquires the stock of another, that swap may be tax-free). There are certain kinds of property other than real estate that qualify under Section 1031, but no one knows about Bitcoin.
The question is whether cryptocurrency will be eligible for tax-free exchanges in 2018 and beyond. Wood thinks that, should a new tax bill pass, the possibility of tax-free exchanges involving Bitcoin will go away. A bigger question, Wood says, is how people have already been reporting on Bitcoin transactions. Real estate transactions have a lot of defined rules attending them, but cryptocurrency is a creature of its own. Wood opines that a lot of people have been ignoring tax questions about Bitcoin transaction
Wood also notes that Coinbase has turned over to the IRS some account details involving cryptocurrency transactions. That will probably cause more people to start paying attention to the tax aspects of Bitcoin transactions.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.