Crypto Like Kind Exchange Rules Before and After 2018
The Tax Cuts and Jobs Act of 2017 changed Section 1031 like-kind exchange rules significantly. For tax years beginning after December 31, 2017, the law limits like-kind exchange treatment to real property only. This means crypto-to-crypto trades no longer qualify, even if they previously might have.
Before 2018, a debate existed over whether cryptocurrency trades could qualify as like-kind exchanges. Section 1031 allowed deferral of capital gains when swapping one business or investment asset for another "like-kind" asset. The IRS never issued formal guidance on crypto specifically in this context. Some taxpayers argued that Bitcoin for Ether was comparable enough; others pointed out that the IRS treated crypto as property, but whether two different crypto assets were "like-kind" was unsettled.
The IRS took a clear position: crypto-to-crypto trades did not qualify. In Notice 2014-21, the IRS stated that virtual currency is property, not currency. Revenue Ruling 2019-24 reinforced that exchanging one crypto asset for another is a taxable event. No like-kind deferral was available under the IRS view, even before 2018, and many tax professionals warned clients against claiming 1031 treatment for crypto trades.
Despite the IRS position, some taxpayers reported crypto-to-crypto exchanges as like-kind on their pre-2018 returns. This created audit risk. The statute of limitations for those years is generally three years from filing, but it can be longer for substantial omissions. Taxpayers who took this position face uncertainty.
A safe harbor option exists for taxpayers who want to correct their position. Revenue Procedure 2021-23 provides a method for amending returns for tax years 2017 and earlier. Taxpayers who claimed like-kind exchange treatment for crypto trades can file amended returns and report the gains. The safe harbor requires filing within certain deadlines. For most, this meant by April 15, 2023, for tax years 2017 and earlier. Taxpayers should consult a tax professional to confirm they meet the requirements.
What changed after 2018
For tax years after December 31, 2017, Section 1031 explicitly limits like-kind exchange treatment to "real property." Crypto does not qualify. Every trade of one crypto asset for another is a taxable sale, even if the trade involves similar tokens or stablecoins. Exchanging USDC for ETH triggers a gain or loss. Swapping BNB for CAKE is a taxable event. The rules are clear now.
Some taxpayers hoped that hard forks or airdrops might be treated differently. They are not. Receiving new tokens through a fork is ordinary income first, then a new cost basis, and trading that new token later is a separate taxable event. No like-kind treatment applies.
Practical Considerations
Crypto-to-crypto trades on decentralized exchanges face the same tax treatment as centralized exchange trades. The IRS does not distinguish based on the platform. Every disposal triggers a realization event. Record keeping is essential: you need the fair market value in USD at the time of each trade.
The change to Section 1031 did not affect crypto held for investment. Holding remains non-taxable. Only trades, sales, or other dispositions trigger gain or loss. This includes converting crypto to stablecoins or using crypto to purchase goods or services.
Summary
Pre-2018 crypto-to-crypto trades were subject to IRS guidance stating they did not qualify as like-kind exchanges. Some taxpayers took a contrary position. The safe harbor in Revenue Procedure 2021-23 offers a path to correct that for eligible years. After 2017, only real property qualifies for Section 1031 deferral. Crypto trades are always taxable events. The rules are now settled and straightforward.
Not financial advice. babybuilder.xyz publishes market data and general information about digital assets. Crypto assets are volatile and you can lose everything you put in. Nothing here is a recommendation to buy, sell or hold, and we make no price predictions.
Prices are sourced from third parties and may be delayed or wrong. Verify anything you intend to act on against a primary source.