Section 1031 of the Internal Revenue Code (IRC) is an important section for cryptocurrency investors to understand. It allows them to avoid paying capital gains taxes on certain property exchanges, including cryptocurrencies. This tax deferment applies not only to trading or exchanging one type of crypto asset for another, but also when swapping with fiat currency like US dollars or Euros.
Under Section 1031, the exchange must involve “like-kind” property – that is, both assets involved in the transaction must be similar enough that they can reasonably be exchanged between each other without any significant differentiation in value or utility. The IRS has stated that this rule only applies to real estate and personal property; it does not apply to stocks, bonds, notes and other forms of financial instruments such as cryptocurrencies. As such, investors cannot use Section 1031 when transferring from one form of digital currency into another – a process known as “swapping” – nor can they use it when converting fiat currencies into digital currencies (or vice versa).
However, there are still ways for cryptocurrency traders and holders to benefit from tax savings related to Section 1031: First off is by taking advantage of the “Like-Kind Exchange” rules outlined in IRC §1033 which allow taxpayers who sell their investments at a gain before December 31st 2017to defer paying taxes until they make a sale after December 31st 2017. Secondly is by creating an LLC and using pass-through taxation method where income generated through business activities can flow directly onto the investor’s personal tax return instead being taxed at higher rates than if incorporated as an S corporation. Lastly investors may consider investing via a retirement account such as Roth IRA or SEP IRA – these accounts offer special investment protections which could provide additional benefits over traditional investments outside these types of accounts .
Ultimately understanding how Section 1031 works with regards specifically to cryptocurrenies requires consulting professional advisors who specialize in this field since laws governing taxation change all time time , however awareness about this section provides insights into possible strategies for reducing overall taxable exposure for individuals trading cryptos .
