Expert Blog is Cointelegraph’s new series of articles by crypto industry leaders. It covers everything from Blockchain technology and cryptocurrencies to ICO regulation and investment analysis. If you want to become our guest author and get published on Cointelegraph, please send us an email at email@example.com.
Broadly stated, a 1031 exchange (also called a like-kind exchange or a Starker) is a swap of one business or investment asset for another. Under US tax code, most swaps are taxable as sales. In fact, the IRS has actively gone after the barter community, trying to tax goods and services that are exchanged.
Section 1031 is an exception to the rule that swaps are generally fully taxable. If you can manage to come within 1031, you’ll either have no tax, or limited tax due at the time of the exchange. In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That way your investment continues to grow, tax-deferred. If you qualify, there’s no limit on how many times or how frequently you can do a 1031.
Primarily used for real estate
Big commercial real estate developers do this all the time. Think Donald Trump.
You can roll over the gain from one piece of investment real estate to another, to another and another. Although you may have a profit on each swap, you avoid tax until you actually sell for cash many years later. Then, you’ll hopefully pay only one tax, at a long-term capital gains rate.
Since the IRS says cryptocurrency is property and not currency, swaps under 1031 should be fine, right? Not so fast – whether 1031 applies to cryptocurrency is debatable. But the debate may not be relevant for much longer, since both the House tax bill and the Senate tax bill propose to restrict 1031 exchanges to real estate only.
The real estate industry is breathing a big sigh of relief that 1031 exchanges are being kept for them. In fact, the vast majority of 1031 exchanges are of real estate. However, some exchanges of personal property (say a painting) can qualify. But exchanges of corporate stock or partnership interests don’t qualify. On the other hand, interests as a tenant in common (sometimes called TICs) in real estate do…