Cryptocurrency traders often ask whether an altcoin trade, exchanging one cryptocurrency for another (e.g., bitcoin for ripple), is a taxable event. For practical and financial reasons, many cryptocurrency traders hoped that it was not. And many taxpayers that conceded altcoin trades were taxable, argued that like-kind exchange rules under I.R.C. sec. 1031 deferred the tax gain.
IRS did not resolve either issue in its IRS Notice 2014-21. Rather, FAQ-6 opaquely stated that a taxpayer realized a gain or loss when trading cryptocurrency for other property.
[Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property? A-6: Yes. If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency. See Publication 544, Sales and Other Dispositions of Assets, for information about the tax treatment of sales and exchanges, such as whether a loss is deductible.]
FAQ-6 fell short of stating altcoin trades were taxable. For tax professionals, however, FAQ-6 sufficiently indicated that altcoin trades were indeed taxable. Yet, many cryptocurrency traders clung to the possibility that these trades are not taxable.
For what appears to be the first time, the IRS explicitly indicated that altcoin trades are taxable events. In June 2019, IRS initiated an enforcement campaign through Letter 6174-A sent to certain taxpayers suspected of not reporting cryptocurrency activity. Letter 6174-A outlined basic tax reporting principles already laid out in IRS Notice 2014-21. Letter 6174-A goes further than the Notice, however. it instructs taxpayers that “an exchange of virtual currency. . . includes another virtual currency such as exchanging Bitcoin for Ether.”
This statement reflects the first conclusive indication regarding altcoin trades. Taxpayers that did not treat altcoin trading as taxable events should amend returns to do so.
For more information visit our other posts on the subject, IRS Launches Cryptocurrency Enforcement Campaign Likely Targeting Coinbase Account Holders and IRS Letter 6174-A, Questions Every Recipient Should Be Asking.
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