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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Chinese Authorities Plan Crackdown on Crypto Mining in Inner Mongolia

“The virtual currency ‘mining’ industry belongs to the pseudo-financial innovation unrelated to the real economy, and should not be supported.” …

Regulators in the Chinese autonomous province of Inner Mongolia have issued a notice demanding a clean-up of the province’s crypto mining enterprises.

Terms of notice

As local crypto outlet ChainNews reported on Sept. 14, five departments within Inner Mongolia have determined the need to rectify the mining industry within the province. The organizations named were the Development and Reform Commission, the Public Security Department, the Office of the Ministry of Industry, The Financial Office and the Big Data Bureau.

According to the report, the regulators’ position is that

“The virtual currency ‘mining’ industry belongs to the pseudo-financial innovation unrelated to the real economy, and should not be supported.”

Impact?

China’s regulatory approach to cryptocurrency mining has been somewhat inconsistent, leaving it unclear exactly what this recent notice will mean for miners operating in Inner Mongolia.

In a tweet reacting to ChainNews’ report, partner at Primitive Ventures and crypto commentator Dovey Wan wrote “I doubt this will have any impact.”

Chinese arithmetic

As of the end of May, China was reportedly responsible for 70% of global BTC mining. At the time, reports emerged that Chinese regulators were investigating illegal mining operations in Sichuan — a province responsible for 70% of China’s Bitcoin (BTC) mining thanks to the electricity generation of the Dadu River Basin.

Back in April, Cointelegraph reported that China’s National Development and Reform Commission was considering a ban on crypto mining throughout the country.

The tentative ban led to speculation that mining would be forced to leave the country or go underground — a troubling proposition for the country that houses the majority of the world’s hash power. To date, no such ban has entered into law.

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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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New Zealand Puts Its Step Forward In Cryptocurrency Arena Through Its Progressive Approach

Since the highly-anticipated launch of the world’s first-ever cryptocurrency, Bitcoin, there has been no looking back for this domain of virtual currencies.

Since the highly-anticipated launch of the world’s first-ever cryptocurrency, Bitcoin, there has been no looking back for this domain of virtual currencies. Having borne its share of applauds and criticism, the digital currency area has established itself as a strong contender of fiat money.

The fast-evolving technologies in the global market have rendered the financial heads to come up with secure, reliable, and progressive payments pedagogy. Cryptocurrency payments, owing to its anonymity factor, have always been under the scrutiny of regulatory authorities from around the world. Where earlier nations competed to outshine in the field of the working sector, the advent of cryptocurrencies has brought them at loggerheads to succeed in establishing themselves as the digital currency rulers.

Blockchain enthusiasts from every corner of the globe are putting in their piece of mind to develop better methods and platforms trading in cryptocurrencies. With the USA, the U.K and other major countries exploring the virtual currency domain, New Zealand has emerged as a strong player in the crypto sphere recently. The country made some path-breaking announcements focused around cryptocurrencies in the current year, making it a hot-shot destination for many.

Recently, the Director of Public Rulings of Inland Revenue Department of New Zealand, Susan Price, revealed about their new legislation which will work as a guiding force in helping the companies in determining the tax implications on cryptocurrency earnings, if the permanent employees’ receive their salaries in crypto coins. The concerned ruling became enforced from September 1, 2019, and shall remain effective for the succeeding three years.

With New Zealand’s government transforming itself as a progressive power in the field of digital payments and services, this new ruling is surely a welcoming step for the crypto space.

The inclination of the people towards digital and decentralized economy lies in line with the aim of the jurisdiction given by the authorities through which the government opines to penetrate its control on crucial tax and payments networks with a practical and realistic approach.

This is not the first time that a country has taken regulatory steps for controlling dealing in cryptocurrencies in the economy. Australia, the U.K, and others have stringent laws concerning the same. Though, New Zealand’s ruling is undoubtedly the next-level step in the arena. The ruling affirms that the crypto payments must be fixed to at least one cryptocurrency. It also gives information about the tax implications related to the payment of salaries and wages.

The global working space is witnessing drastic changes in the work patterns and payment methods. Markets and institutions that will understand the complexities and demands of the growing economy and will shift from the traditional ways to the new digital pedagogy are sure to get the early-bird benefits.

New Zealand is indulgence in the growth of technology firms and startups in its native land to attract the best minds for its development. The jurisdiction given by the government will help in the implementation of regulations in crypto payment systems, thereby flourishing the industry.

The efforts shown by the New Zealand government in developing and pushing the economy to a digital working paradigm, it sets a benchmark for the world to see and follow. By recognizing the need of the hour, New Zealand, through its progressive steps, shows its trust in cryptocurrencies evolving as the ultimate payments-facilitating power soon.

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China’s PBC Is Warming Up To Digital Currencies — Good News For Bitcoin, ETH, XRP, and LTC

That may come as a big surprise to some. Back in 2017, China banned Initial Coin Offerings (ICOs), and stopped direct Bitcoin-yuan trading, crushing …

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China’s Central Bank, the People’s Bank of China (PBC), is planning to introduce its own digital currency.

That’s according to an article published in Globaltimes last week, which says that the PBC applied for 74 patents involved with digital currencies to the National Intellectual Property Administration, in order to speed up the development of a legal digital currency.

That may come as a big surprise to some. Back in 2017, China banned Initial Coin Offerings (ICOs), and stopped direct Bitcoin-yuan trading, crushing cryptocurrency markets.

Now, cryptocurrency experts see PBC’s efforts to introduce its own digital currency as a recognition of the many advantages cryptocurrencies have over traditional currencies, and therefore, consider those efforts to be good news for major cryptocurrencies like BTC,ETH, XRP, and LTC.

Kevin Sekniqi, Co-Founder and Chief Protocol Architect at AVA Labs, is one of these experts.

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“China’s foray into digitizing the yuan is a key milestone in changing how money is represented, stored, and moved,he says. “Global, sovereign level adoption of digitized assets is a testament to how transformative and impactful decentralized ledger networks have become.”

Meanwhile, he sees PBC’s move as a source of further financial innovation. “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,” he says.

Dave Hodgson, Director and Co-Founder ofNEM Ventures, agrees. “It’s positive to see the Chinese Central Bank engaging with digital financial services and moving towards a better user experience for its citizens,” he says.

Still, he points to the centralized nature of PBC’ proposed currency as a limiting factor.

“The proposed approach is still a centralized system, run by a national government,” he says. “As a result, 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. “

While Hodgson sees the new currency competing with China’s other digital currency, he doesn’t see it competing with major cryptocurrencies. “I believe that this move will likely disrupt other digital currencies in China, such as WeChat and Alipay,” he says. “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.”

Pradeep Goel, CEO of Solve.Care, sees central bank-issued digital currencies as supplementing major cryptocurrencies, too. “The uses of digital currencies have significant potential and known benefits, and these advantages are compelling enough to merit the careful adoption of these currencies,” he says. “Whether the private sector leads and central banks follow, or whether the central bank leads and the private sector follows, will vary by country. For example, in Sweden, the central bank is leading the way with the introduction of an e-krona.”

And Tomer Afek, CEO and Co-Founder of Spacemesh, sees other central banks following through with their own digital currencies. “It’s a certainty that other central banks will follow China’s lead; the writing’s on the wall. Currency is already well on its way to becoming fully digitized, and cryptocurrencies are a necessary evolution – and revolution – of that process,” says Afek. “States will inevitably want to ride the wave, hoping to get ahead of its potential to shake up the status quo.

That could create a world of multiple cryptocurrencies.

“This is only the beginning for cryptocurrencies, and they’ve already proven their ability to capture the value that has been omitted by the traditional monetary system,” he says. “I envision a world where multiple cryptocurrencies exist, each one serving a different need. The central banks will just become another set of competitors and service providers in this system.”

Still, the central banks will always have the upper hand, ready to trash decentralized cryptocurrencies should they threaten their monopoly of creating money, as discussed in previous pieces here.

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