The Case Against Like Kind Exchange Treatment for 2017

Index - https://steemit.com/tax/@alhofmeister/tax-blog-index

Below I have laid out the argument against application of IRC 1031 to crypto to crypto trades during 2017. Although like kind exchange treatment is arguably a defensible position should a taxpayer decide to take it, I feel the position could run afoul of the more likely than not standard.

1. Filing requirements (form 8824) - For each like kind exchange claimed by the taxpayer, Form 8824 will need to be filed. In the event that the IRS takes the position that cryptocurrency never qualified for like kind exchange treatment, they will have a roadmap to finding the taxpayers with the greatest exposure.

2. Securities do not qualify for like kind exchange - In release No. 81207 ("21(a) Report") which was subsequently commented on by the SEC Chairman, the SEC took the position that unless a promoter can demonstrate that a cryptocurrency is not a security, it will be subject to securities laws (see references for the full report/commentary).

3. Limited benefit from the deferral of income taxes - As demonstrated in Case Study 2-1 (referenced below), the benefit for deferring the tax associated with cryptocurrency might be negligible. The impact of the deferral will largely be dependent upon whether the gain qualifies for long-term treatment in 2018 as well as the legal entity structure that the taxpayer has set up. In the example, the conservative option paid an extra $19 in 2017 and $12 less in 2018 resulting in an overall increase in $7. This determination, however, is going to be largely dependent upon the facts and circumstances associated with a taxpayer.

4. Exposure to interest and penalties - Taking a more aggressive position exposes a taxpayer to additional penalties and interest. A taxpayer, however, might be able to get the penalties waived on the grounds that the law is ambiguous in 2017.

5. Compliance expense associated with filing an amended return - In the event that the IRS revises the tax liability on a 2017 return, the taxpayer will likely want to amend their 2018 tax return to claim the additional basis (tax benefit). The cost associated with filing those returns represent an added incentive to take a conservative position.

6. Experience working with the IRS - Based on my personal experience reviewing tax cases and dealing with IRS agents, I have found the IRS to be aggressive in their efforts to maximize tax revenues for the government. There are instances of the IRS disagreeing and not changing policy even when the tax situation has been litigated. A famous example of this is Jenkins v. Commissioner, T.C. Memo 1983-667 (U.S. Tax Court Memos 1983).

7. Prior guidance does not preclude them from taking the position - Notice 2014-21 does not specify a position for the IRS on the subject of whether like kind exchange treatment extends to crytpocurrencies.

References
https://www.irs.gov/pub/irs-pdf/f8824.pdf
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11#_ftn5
https://www.sec.gov/litigation/investreport/34-81207.pdf
https://steemit.com/tax/@alhofmeister/case-study-2-1-taxation-of-cryptocurrency-altcoins-tax-liability
https://www.leagle.com/decision/198328547autcm2381239
https://www.irs.gov/pub/irs-drop/n-14-21.pdf

IRS Response to Ode to Conway Twitty
Our reaction to the Court's opinion is reflected in the following "Ode to Conway Twitty: A Reprise":

Harold Jenkins and Conway Twitty
They are both the same
But one was born
The other achieved fame.
The man is talented
And has many a friend
They opened a restaurant
His name he did lend.
They are two different things
Making burgers and song
The business went sour
It didn't take long.
He repaid his friends
Why did he act
Was it business or friendship
Which is fact?
Business the court held
It's deductible they feel
We disagree with the answer
But, let's not appeal.
RECOMMENDATION Nonacquiescence
DAVID C. FEGAN Attorney
JOEL GERBER Acting Chief Counsel
By: CLIFFORD M. HARBOURT Senior Technician Reviewer Branch No. 2
Tax Litigation Division

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.