Cryptocurrency Personal Property Exchanges Pre-TCJA

We’ve been discussing virtual currency, cryptocurrencies, and digital currency quite a bit lately here. That’s by design. They’ve all been in the media a …

We’ve been discussing virtual currency, cryptocurrencies, and digital currency quite a bit lately here. That’s by design. They’ve all been in the media a lot lately. That’s largely due to the increased tax collection efforts by the IRS. Many bitcoin holders started out with the impression that they were “outside the system”. Despite those impressions, though, the IRS has made it abundantly clear that this isn’t the case.

Now, the IRS is looking at cryptocurrency investors and their cryptocurrency transactions with focused attention. The IRS is just like any other person or entity. That is, it doesn’t want to waste its time and energy. And this means that it wisely directs its attention to those who have the most resources. Many bitcoin holders have massive tax liabilities to the IRS. The media is focusing on them. The IRS doesn’t want to lose its slice of the pie. Accordingly, we’re now we’re seeing it exert increased efforts to use the tax law to move in that direction.

Personal Property Classification

The IRS’ classification of cryptocurrency as “personal property” for a tax year has some interesting implications. One implication is that cryptocurrencies may have been eligible in “personal property” 1031 exchanges prior to the Tax Cuts & Jobs Act (TCJA). This issue is moot now, though, because the TCJA eliminated all personal property exchanges. But we may also see reviews of exchanges which occurred before the TCJA was implemented. In this post, we will go over the basics of personal property exchanges and then discuss some of the issues which may come up when pre-tax reform crypto exchanges are examined by the IRS in an audit. We’ll look at issues like potential short term capital gains taxes.

Personal Property Exchanges Pre-TCJA

Prior to the TCJA, taxpayers were able to exchange personal property held for business or investment purposes under Section 1031 in like kind exchanges. Many intermediaries specialized in personal property exchanges, and those intermediaries went out of business the moment that the TCJA took effect. Common exchange items, pre-TCJA, were for assets like business jets, cars owned by rental agencies, precious metals and antique cars. The rules for exchanging personal property were a bit different than the rules for real estate. The like-kind requirement, for instance, was interpreted more narrowly, as personal property had to be matched, according to “asset class.” This meant that a business jet couldn’t be exchanged for gold, for instance.

Before the TCJA, many crypto holders asked the question: does Section 1031 apply to bitcoin and other cryptocurrency? Is Form 8824 a required attachment to a Form 1040 personal income tax return? ? In light of the IRS position in Notice 2014-21, the logical response appears to be “yes.” If bitcoin and other cryptocurrency is taxable, then they should also be eligible for tax deferral. But, in light of the novelty of cryptocurrency, it’s likely that crypto exchange gains or losses occurring pre-TCJA will be reviewed by the IRS.

Review of Pre-TCJA Crypto Exchanges

If the IRS does review crypto exchanges occurring in the pre-TCJA era, what will be the outcome? These exchanges would seem to touch on key legal requirements, such as the like-kind requirement. If a person exchanges bitcoin for another cryptocurrency, such as Ethereum, does that satisfy the like-kind requirement? The answer seems to be yes, as they are both “cryptocurrency” and have similar features. But, what if there is a bitcoin exchange for another currency altogether, such as Japanese Yen or Mexican Pesos? If cryptocurrency is classed as property, then a logical argument can be made that it should also be in the same asset class as other currency. This could even mean that cryptocurrency exchanged for U.S. dollars could qualify for tax deferral. We won’t know the answer until we know the asset class which cryptocurrency falls into. That, in turn, will require an IRS ruling.

As we know, exchanges are documented at the time of their occurrence, in order to be valid. Accordingly, crypto holders cannot retroactively go back and try to claim that a particular transaction was an “exchange” after the fact. If someone sells their rental property and then later tries to use that property in an exchange, they will fail. That’s because that property became ineligible the moment it was sold without a contract with an intermediary. But clearly we can see that many issues come up when we discuss cryptocurrency in the context of Section 1031. If personal property exchanges return, and there’s a chance that they might, we’ll undoubtedly see cryptocurrency figure prominently in the debate.

Contact MC&C to Learn More Today

So there you have it. We may see a few crypto exchanges scrutinized by the IRS to see if those exchanges qualified under the old rules. If this does happen, the outcome will be interesting. There’s a chance that personal property exchanges may again be recognized in the future; so crypto exchanges may return. Who knows, we may even see this issue lobbied for by cryptocurrency enthusiasts during the next tax law change.

At Mackay, Caswell & Callahan, P.C., we try hard to stay on the cutting-edge of tax law. We do this by keeping up with current issues and reviewing current cases. We’ll continue to keep a focus on the evolving cryptocurrency tax treatment. That’s because we know that this is a key topic, both in the media, and the tax world, today. In addition to helping clients who have crypto tax debt, we handle cases involving New York income tax debt, sales tax debt, OICs, installments, and other tax matters. If you have a tax case and need assistance, don’t hesitate to reach out to us. Contact us and one of our top New York City tax attorneys will review your issue right away.

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Is China Finally Easing Up on Cryptocurrencies?

… according to experts, the establishment is beginning to see the benefits of mainstream coins like bitcoin, Ethereum, Litecoin, EOS and bitcoin cash.

It looks like some people (or entities) can change their minds after all. Despite a mixed relationship with cryptocurrency in the past, the People’s Bank of China (PBC) appears to finally be easing up to it.

Is China Becoming “Friendlier?”

As China’s central bank, the financial institution is looking to release its own digital currency in the future. This is not the same digital currency that China had initially announced weeks ago as a means of combating Libra. This would be an entirely separate entity, as according to experts, the establishment is beginning to see the benefits of mainstream coins like bitcoin, Ethereum, Litecoin, EOS and bitcoin cash.

This should come as relatively surprising news given that China has not always been kind (or fair) to digital currencies. The country has initiated a full ban on initial coin offerings (ICOs) and foreign exchanges and is even considering a full ban of cryptocurrency mining, though the country has been slow to act on this.

Kevin Sekniqi, co-founder and chief protocol architect at AVA Labs, says:

China’s foray into digitizing the yuan is a key milestone in changing how money is represented, stored and moved. Global sovereign level adoption of digitized assets is a testament to how transformative and impactful decentralized ledger networks have become… Coupled with the fact that China has completely adopted digital payment technologies, we can hope that a digital currency issued by the PBOC will further augment China’s ability to build many new financial primitives.

Dave Hodgson, director and co-founder of NEM Ventures, seems to agree with Sekniqi, though he’s critical of the centralized nature of the bank’s new digital currency, commenting that this goes against everything crypto is all about. He states:

It’s positive to see the Chinese Central Bank engaging with digital financial services and moving towards a better user experience for its citizens, but the proposed approached is still a centralized system, run by a national government… This wouldn’t be considered a decentralized cryptocurrency and in the People’s Bank of China’s words, ‘It is to protect our monetary sovereignty’ – a pseudonym for control over currency… I believe that this move will likely disrupt other digital currencies in China, such as WeChat and Alipay. While other governments may take note and follow suit, this currency doesn’t appear to be cross-border and is centrally controlled, which makes it a different proposition to cryptocurrency altogether.

Many Banks Will Do the Same Thing

Tomer Afek, CEO and co-founder of Spacemesh, says that other banks are likely to copy the work of China’s Central Bank, which could lead to a world of multiple cryptocurrencies:

Cryptocurrencies are a necessary evolution – and revolution…I envision a world where multiple cryptocurrencies exist, each one serving a different need. The central banks will become another set of competitors and service providers in this system.

Tags: china, China Central Bank, cryptocurrency

Cryptocurrency This Week: SWIFT Calls Crypto ‘Useless’, Apple Finds It ‘Interesting’, And More

Despite the international agency Financial Action Task Force having made necessary guidelines pertaining to cryptocurrency to stop money …

Despite the international agency Financial Action Task Force having made necessary guidelines pertaining to cryptocurrency to stop money laundering and financing terrorists, regulatory authorities across the globe are seemingly confused over cryptocurrencies.

While IMF chairperson Christine Lagarde wants everyone to be open towards regulating cryptocurrencies, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) spokesperson criticised cryptocurrency as “useless.”

On cryptocurrency, the spokesperson reportedly said,

“They go down in value like a yoyo, they’re useless and unstable. And even if crypto companies do make it stable, it’s still a basket of currencies,”

Meanwhile, US Securities and Exchange Commission (SEC) has been widely criticised for not permitting Bitcoin ETF (Exchange Traded Fund). Speaking to CNBC, SEC Chairman Jay Clayton has now averred that progress is being made and soon the SEC may allow Bitcoin ETF too.

“An even harder question given that they trade on largely unregulated exchanges is how can we be sure that those prices aren’t subject to significant manipulation? … People needed to answer these hard questions for us to be comfortable that this was the appropriate kind of product,” commented Clayton.

Let’s take a look at other developments of the week!

France Warns EU Against Facebook’s Libra

Urging the European Union to create a common set of rules for cryptocurrencies, minister of economy and finance, France Bruno Le Maire after EU finance ministers’ meeting at Helsinki said that Libra could cause risks to consumers, financial stability and even the sovereignty of European states.

According to reports, Maire has even asked for blocking Libra in Europe, and called for the creation of a common framework on digital currencies at the EU level. Maire also advocated for the creation of a fiat cryptocurrency especially for EU to counter risks posed by Libra.

Meanwhile, Libra Consortium is applying for a payment-service license in various countries including Switzerland.

Regulators Should Be ‘Open’ Towards Crypto: IMFChairperson

Interestingly, while France and many other EU countries are voicing against Libra, Christine Lagarde, presidential nominee for the European Central Bank and chairman of the International Monetary Fund (IMF) has urged regulators to be agnostic towards blockchain, and crypto-related regulatory frameworks.

In her opening statement to the Economic and Monetary Affairs Committee of the European Parliament, Lagarde stated that central banks and supervisors need to ensure the safety of the financial sector, but also to be open to the opportunities provided by change. She added,

“In the case of new technologies – including digital currencies – that means being alert to risks in terms of financial stability, privacy or criminal activities, and ensuring appropriate regulation is in place to steer technology towards the public good. But it also means recognising the wider social benefits from innovation and allowing them space to develop.

We Are Watching: Apple Exec On Crypto

Unlike Samsung, Facebook and many other companies, Apple has not shown any active interest towards Bitcoin or cryptocurrency yet.

However, recently, speaking to CNN, Jennifer Bailey, vice president of Apple Pay finally spoke on Apple’s interest towards crypto. He said, “We’re watching cryptocurrency. We think it’s interesting. We think it has interesting long-term potential.”

Domino’s Pizza Giving $100K Bitcoin Prize in France

Popular Pizza maker Domino’s in France has announced plans to give away Bitcoin worth $110K to the lucky buyer for the occasion of its 30th anniversary.

“Try to win € 100,000 in cash or bitcoin by ordering one of your favourite pizzas,” reads the company webpage. The contest began on September 4 and will allow buyers to participate in the game until October 2.

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Why is France’s finance minister at war with Facebook’s cryptocurrency?

On Thursday September 13, the French Finance Minister expressed his opposition to the development of the digital currency in Europe, asserting that: …
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Bruno Le Maire has found a punching bag: Libra, Facebook’s blockchain currency project. On Thursday September 13, the French Finance Minister expressed his opposition to the development of the digital currency in Europe, asserting that: “Our monetary sovereignty is at stake.”

“It’s a bit like Bruno Le Maire versus Libra Act II or Act III,” Loïc Sauce, an economist and cryptocurrency expert at the Institute of Higher Education in Marketing and Commerce (ISTEC), told FRANCE 24. Le Maire has been wary of the project since Facebook announced in June its plan to enable its nearly two billion users to pay and send money with its new currency, Libra.

Protecting the government’s domain

Initially circumspect, Le Maire has since become openly hostile to the plan. In addition to the risk to sovereignty, he has also cited the “danger to consumers” and “systemic risk” when talking about Libra.

“The minister’s reaction is understandable. The power to mint coins is historically the prerogative of the state. Now there is a group of private enterprises (the Libra Association the non-profit that will oversee the currency includes companies such as MasterCard, Uber, Spotify and Vodaphone) saying that their currency is more useful than those being employed in the territories where Facebook is present,” said Michel-Emmanuel de Thuy, digital director at 99 Advisory, a management consulting firm that specialises in the financial sector.

Le Maire hasn’t shied away from hitting Facebook where it hurts. By raising the issue of monetary sovereignty, Le Maire is insinuating that, if successful, Libra could interfere with monetary policies, de Thuy noted. If two billion people turn to Libra for a portion of their online transactions, “governments risk losing control over a significant part of financial flows, which would deprive them of information that is important for determining monetary policy,” said Nathalie Janson, an economist and bitcoin specialist at the Neoma Business School.

For the time being, Facebook is only considering using Libra to allow its users to transfer funds through its site or its messaging services (WhatsApp, Messenger) and to pay some of its merchant partners online. “But as technological progress accelerates, some countries may fear that this dematerialised currency will, in the not too distant future, be used to pay for everyday purchases, such as baguettes,” de Thuy said.

Facebook ‘too big to fail’

In a world where Libra is established as a currency that competes with the euro, the dollar, or other currencies, Facebook would become de facto “too big to fail”, like the banks that governments cannot let go bankrupt for fear of destabilising their entire economies. If Mark Zuckerberg’s Facebook empire were to collapse, the money that users had in their Calibra virtual portfolios managed by Facebook “would not be covered by a government guarantee, as can be the case with bank accounts, and the losses could affect the entire economy. This is the systemic risk that Bruno Le Maire is referring to,” Janson explained.

These worst-case scenarios remain hypothetical and Libra is still in the development stages. But Le Maire believes that prevention is better than cure. He is not the only one: American senators also strongly expressed their opposition to Facebook’s planned currency during the July 2019 hearing of David Marcus.

But figuring out how to respond is not easy. “Lawmakers could, at most, prohibit the payment of taxes in Libra and a court could sanction a contract that uses this currency as a means of payment,” Janson said. Sauce concurred. “Beyond that, the state’s means of intervention are very limited. If an American website, for example, decides to allow payment in Libra, France cannot prohibit it,” he said.

A public cryptocurrency to counter Libra?

Likely aware of those limits, Le Maire seems to be in favour of creating a digital currency managed by central banks a kind of public Bitcoin – in response to Libra. In an interview with La Croix newspaper (and without ever mentioning Facebook’s initiative) he explained that such a digital currency would have the advantage of making “transactions faster and cheaper” (because there would be fewer costs associated with cash management) and would facilitate access to financial services for “less bankable” populations. These are, almost word for word, the advantages Facebook cited when presenting Libra.

Le Maire drove the point home on September 13 by issuing a joint statement with his German counterpart, Olaf Scholz, urging the European Central Bank (ECB) to “accelerate its thinking on a public digital currency”.

“This idea of a public virtual currency has been discussed by central banks for years, but has never been a priority. In a sense, it can be said that the threat of the arrival of Libra has made the debate on the modernisation of the currency more pressing,” de Thuy said.

Such a currency would have the advantage over Facebook’s of “benefitting from the official guarantee of the central bank”, Janson said. But all of the European governments would need to agree on its creation, first in principle and then on the details. In other words, Facebook may have time to introduce its Libra and cash in before the ECB even has a chance to propose an alternative.

The battle between certain countries including France and Facebook for the future of currency could have an unintended victim: the pioneering spirit of cryptocurrencies. Both Libra and the public project proposed by Le Maire call for systems controlled by a central body; whether it is the Libra Association in Geneva or the ECB. These projects are far from the ideal defended by Bitcoin’s promoters, who want to establish a system that would be free of intermediaries, such as banks, and of organisations at the top of the pyramid. Whether it is Libra or a public digital currency that gains a foothold, either would be a blow to the revolutionary ambitions of the original cryptocurrency movement, which aimed to establish a new financial system, Janson concluded.

<span lang=”EN-US”><span>This article was adapted from the original in French.</span></span>

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Why is France’s finance minister at war with Facebook’s cryptocurrency?

French Finance Minister Bruno Le Maire only has harsh words for Libra, Facebook’s planned cryptocurrency. He wants to block its development in …
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Bruno Le Maire has found a punching bag: Libra, Facebook’s blockchain currency project. On Thursday September 13, the French Finance Minister expressed his opposition to the development of the digital currency in Europe, asserting that: “Our monetary sovereignty is at stake.”

“It’s a bit like Bruno Le Maire versus Libra Act II or Act III,” Loïc Sauce, an economist and cryptocurrency expert at the Institute of Higher Education in Marketing and Commerce (ISTEC), told FRANCE 24. Le Maire has been wary of the project since Facebook announced in June its plan to enable its nearly two billion users to pay and send money with its new currency, Libra.

Protecting the government’s domain

Initially circumspect, Le Maire has since become openly hostile to the plan. In addition to the risk to sovereignty, he has also cited the “danger to consumers” and “systemic risk” when talking about Libra.

“The minister’s reaction is understandable. The power to mint coins is historically the prerogative of the state. Now there is a group of private enterprises (the Libra Association the non-profit that will oversee the currency includes companies such as MasterCard, Uber, Spotify and Vodaphone) saying that their currency is more useful than those being employed in the territories where Facebook is present,” said Michel-Emmanuel de Thuy, digital director at 99 Advisory, a management consulting firm that specialises in the financial sector.

Le Maire hasn’t shied away from hitting Facebook where it hurts. By raising the issue of monetary sovereignty, Le Maire is insinuating that, if successful, Libra could interfere with monetary policies, de Thuy noted. If two billion people turn to Libra for a portion of their online transactions, “governments risk losing control over a significant part of financial flows, which would deprive them of information that is important for determining monetary policy,” said Nathalie Janson, an economist and bitcoin specialist at the Neoma Business School.

For the time being, Facebook is only considering using Libra to allow its users to transfer funds through its site or its messaging services (WhatsApp, Messenger) and to pay some of its merchant partners online. “But as technological progress accelerates, some countries may fear that this dematerialised currency will, in the not too distant future, be used to pay for everyday purchases, such as baguettes,” de Thuy said.

Facebook ‘too big to fail’

In a world where Libra is established as a currency that competes with the euro, the dollar, or other currencies, Facebook would become de facto “too big to fail”, like the banks that governments cannot let go bankrupt for fear of destabilising their entire economies. If Mark Zuckerberg’s Facebook empire were to collapse, the money that users had in their Calibra virtual portfolios managed by Facebook “would not be covered by a government guarantee, as can be the case with bank accounts, and the losses could affect the entire economy. This is the systemic risk that Bruno Le Maire is referring to,” Janson explained.

These worst-case scenarios remain hypothetical and Libra is still in the development stages. But Le Maire believes that prevention is better than cure. He is not the only one: American senators also strongly expressed their opposition to Facebook’s planned currency during the July 2019 hearing of David Marcus.

But figuring out how to respond is not easy. “Lawmakers could, at most, prohibit the payment of taxes in Libra and a court could sanction a contract that uses this currency as a means of payment,” Janson said. Sauce concurred. “Beyond that, the state’s means of intervention are very limited. If an American website, for example, decides to allow payment in Libra, France cannot prohibit it,” he said.

A public cryptocurrency to counter Libra?

Likely aware of those limits, Le Maire seems to be in favour of creating a digital currency managed by central banks a kind of public Bitcoin – in response to Libra. In an interview with La Croix newspaper (and without ever mentioning Facebook’s initiative) he explained that such a digital currency would have the advantage of making “transactions faster and cheaper” (because there would be fewer costs associated with cash management) and would facilitate access to financial services for “less bankable” populations. These are, almost word for word, the advantages Facebook cited when presenting Libra.

Le Maire drove the point home on September 13 by issuing a joint statement with his German counterpart, Olaf Scholz, urging the European Central Bank (ECB) to “accelerate its thinking on a public digital currency”.

“This idea of a public virtual currency has been discussed by central banks for years, but has never been a priority. In a sense, it can be said that the threat of the arrival of Libra has made the debate on the modernisation of the currency more pressing,” de Thuy said.

Such a currency would have the advantage over Facebook’s of “benefitting from the official guarantee of the central bank”, Janson said. But all of the European governments would need to agree on its creation, first in principle and then on the details. In other words, Facebook may have time to introduce its Libra and cash in before the ECB even has a chance to propose an alternative.

The battle between certain countries including France and Facebook for the future of currency could have an unintended victim: the pioneering spirit of cryptocurrencies. Both Libra and the public project proposed by Le Maire call for systems controlled by a central body; whether it is the Libra Association in Geneva or the ECB. These projects are far from the ideal defended by Bitcoin’s promoters, who want to establish a system that would be free of intermediaries, such as banks, and of organisations at the top of the pyramid. Whether it is Libra or a public digital currency that gains a foothold, either would be a blow to the revolutionary ambitions of the original cryptocurrency movement, which aimed to establish a new financial system, Janson concluded.

<span lang=”EN-US”><span>This article was adapted from the original in French.</span></span>

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