I had an interesting conversation with Robert Green, CPA, of GreenTraderTax.com last week. We discussed the potential issues around how income will be declared for forks and if like-kind exchanges are valid.
Fork Income
With regard to the last Bitcoin Cash fork in August 2017, Green writes that the Bitcoin Cash fork would be treated as income using the daily value at the time, which was trading at around $266 (Bitcoin.Tax uses $277.20), however, each fork may be treated differently. The previous well-known fork, ETH to ETC, back in July 2016 was treated differently. There was no established price or futures market for ETC before it happened. As previously mentioned by Tyson Cross, tax attorney,
Ethereum Classic had no readily ascertainable value.
So it would be impossible to say what it was worth on that day, which is why zero cost has been used as a cost basis.
The SegWit2x (B2X) fork due this November could be similar to Bitcoin Cash. B2X is trading on various futures markets at HitBTC and Bitfinex for between $951 and $1,153 as at 1st Nov 2017. However, Bitfinex is no longer officially available to US customers and HitBTC is based in Hong Kong. Is there complete dominion to this income? Or will there be come the fork date?
1031 Like-Kind Exchanges
Another topic of discussion was the consideration of 1031 like-kind exchanges. This is something more commonly seen in real estate, where one property can be sold and the proceeds used to purchase another with no capital gains.
However, those properties must meet certain requirements, such as being for business or investment use, and of the same nature, character or class.
In absence of specific guidance from the IRS on the likeness of digital currencies (is BTC like ETH) opinions have been divided. Green's advice to clients is to not use deferred income.
First, Bitcoin does not qualify as like-kind property with another coin. Second, coin-to-coin trades primarily executed on exchanges are not “direct two-party exchanges” or “multi-party exchanges using a qualified intermediary.
Bitcoin.Tax does allow the user to choose like-kind treatment although that is not the default option. This is a feature requested by other tax accountants and also could be applicable for users in other countries. However, if a US tax payer is advised or decides to use 1031 they must also include a 8824 form declaring the deferred gains for each exchange. Clearly, this form is not designed with digital currencies in mind as a 2 page form for every exchange is impractical with thousands of trades. Therefore, rather than provide the PDF form, Bitcoin.Tax instead creates an 8824 downloadable statement.
Bitcoin.Tax is leading capital gains calculator for digital currencies for US and worldwide users, traders and investors. You can try Bitcoin.Tax for free at https://bitcoin.tax/signup.
This post is the opinion of the author and not financial or tax advice. Please speak to your own expert, CPA or tax attorney on how you should treat taxation of digital currencies. Our list of Bitcoin and digital-currency knowledgeable experts can be found at https://bitcoin.tax/cpa.