Why Like-King Property Exchange Rules Should Be Applied to Cryptocurrency Trading
In my opinion like-kind property rules for real estate should be applied to cryptocurrency trading. This rule would help smaller investors avoid potential traps, and would still require traders to pay taxes on profits.
What is like-kind property exchange? Like-kind property exchange allows people to swap between similar investment properties without realizing capital gains and losses. The rule arguably used to apply to all investment properties but since 2018 only applies to real estate.
What is the point of like-kind property exchange? The purpose of like-kind property exchange differs by asset, but in crypto it would stop things like trading ETH to BTC as being counted as a taxable event. This wouldn’t allow people to avoid taxes, as they would still owe if they used crypto as currency or went back to fiat, but it would help avoid smaller players from owing un-payable tax bills on bad trades.
Do like-kind rules apply to cryptos? The IRS never explicitly said like-kind didn’t apply, and you could argue that until 2017 like-kind did in fact apply. Problem is a new U.S. tax law specifically limited like-kind to real estate only. So like-kind for sure does not apply to 2018 forward unless a rule change is issued.
Why apply like-kind rules for small players? In the current system if you bought crypto in 2017, then traded crypto-to-crypto at the height of the 2017 bubble in December, and then were back in another crypto by 2018 and held until summer 2018, you have epic losses in 2018 and epic gains in 2017. You maybe only swapped around between alts and BTC, but you are now effectively a rekt. It only gets worse if you keep this up in future years. If capital gains rates apply to you, but you aren’t rich and don’t have other capital gains, this can eat your entire bankroll in a matter of a year or two.
Why apply the wash rule for big players? Big players can get in the same situation as small players, but mostly big players have enough money to game this system. They can tactically balance gains and losses and tend to have other capital gains. Still, for those who need like-kind to avoid their own un-payable tax bill, it would help them as well.
Bottomline: You can’t use crypto for payments or cash out to fiat without squaring up with the IRS. That is fair. What does not feel as fair is when you trade your BTC for alts at the height of the 2017 bubble and then owe more in taxes than you have in net worth by 2018. If like-kind applies, this situation is avoided, if it doesn’t, Joe the crypto trader is ruined and the IRS will be seeking payment for money Joe doesn’t have.
Moving forward with reform: In general we need tax reform for the average crypto trader. For the average Joe or Jane it really makes little sense to tax them on cryptos floating around in some exchange account unless they use those cryptos as money or deposit fiat back into their accounts. There is more than one way to offer this. But rules that already exist 1. like-kind, 2. wash rule, and 3. reporting requirements for exchanges would solve 99.9% of the issues. Without like-kind exchange, the wash rule, and reporting requirements many traders will have their lives ruined by crypto and will be unable to pay their tax bills. We expect the average person to tally up crypto profits and losses (near impossible), to treat every trade between coins as being the same as cashing out (absurd), and then we won’t recognize trades back to a crypto within 30 days as effectively being in that crypto the whole time (needlessly harsh). Crypto traders who got into crypto in 2017 have already been ruined, most just don’t realize it yet, they need relief, not un-payable tax bills, fees, and the risk of jail time.