As cryptocurrency continues to work its way into the mainstream, many investors are starting to ask whether exchanging one type of this virtual currency for another can qualify for capital gains deferral under section 1031.
To date, the IRS has classified cryptocurrency as property (and has not excluded it specifically within section 1031), the intuitive answer would be yes. However, recent court decisions have begun to treat cryptocurrency as reportable income to the US government.
So now it seems that the IRS is attempting to treat cryptocurrency as both property and currency. Likewise, the American Institute of CPAs is also recommending that cryptocurrency assets be reported to the IRS on Form 8938.
For a full analysis of the issue, read this article.
But the bottom line is…whether cryptocurrency can safely be exchanged – and capital gains deferred – has not yet been tested with the IRS, so the outcome remains unclear.