Is the Exchange of a Cryptocurrency or Digital Token a Taxable Event?
Most people consider bitcoin to be “cryptocurrency.” However, from a federal income tax standpoint, bitcoin and other cryptocurrency is not a currency. On March 25, 2014, the IRS made its first and only stance on virtual currency.
According to the IRS notice:
“Virtual currency is treated as property for U.S. federal tax purposes…General tax principles that apply to property transactions apply to transactions using virtual currency.”
In that statement, it became clear that the IRS treats cryptos as a capital asset.
As a result, it’s subject to short-term or long-term captains gains tax rates if investors hold the assets greater than 12 months.
Exchange of a Cryptocurrency
Therefore, it’s important to remember that when you sell or exchange a cryptocurrency for cash or another cryptocurrency, etc., it’s subject to short-term or long-term capital gains/losses. This is based on what you paid for the crypto, hold period and price you sell or exchange it for.
Generally, the IRC provides an exception to the gain on a business or investment property transaction. The IRC allows you to postpone paying tax on the fain if you reinvest the proceeds in similar property. This is a qualifying like-kind exchange.
A Taxable Event
When gains are deferred in a like-kind exchange, according to the IRC, it’s tax-deferred. However, it isn’t tax-free. Under the Trump tax plan, beginning in 2018, exchanges are now only limited to real property. Therefore, for 2018 and beyond, the like-kind exchange exception will not apply to cryptocurrency investors.
As a result, the sale or exchange of one crypto for another will be a taxable event. This is because it will trigger a capital gain or loss depending on the difference between the purchase and sale price.