Why Tax Deferral for Crypto-to-Crypto Like-Kind Exchanges Would Be Good for Us All
With the 118th U.S. Congress barreling its way in, right behind the lame duck session hobbling its way into history, it’s time to round out an attractive, legislative agenda for the blockchain sector for 2023 and beyond.
Todd White is the founder of, and Ralph Benko the senior counselor to, the American Blockchain PAC. This article is part of CoinDesk's Policy Week.
The blockchain industry, and the American economy, would benefit from tax deferrals for crypto-to-crypto transactions (e.g., BTC to ETH). This would be akin to the Internal Revenue Code’s Section 1031 like-kind exchange provision for real estate transactions.
Real estate investors can, within broad limits, “trade in” an apartment building for a shopping center or medical center or McMansion – or other property – while deferring realization of taxation on increased value until they cash out. Makes sense!
Until an investor starts consuming her profits – e.g., cashing out to buy yachts, caviar, champagne, Chippendale furniture (or dancers – it really is better for the American economy to allow her to temporarily roll over her profits, tax deferred, into a “like-kind” asset.
Capital assets are the source of productivity and, thus, American equitable prosperity. That purpose – to “promote the general welfare” – is one of the six purposes of the U.S. Constitution cited in its preamble.
Arguably, failing to allow deferral of taxation on a like-kind exchange – such as crypto-to-crypto (until gains eventually are realized in a legal tender currency such as U.S. dollars) – could be considered unconstitutional, at least in spirit (since the preamble is considered non binding).
Look to precedent! What does the Section 1031 like-kind exchange deferral for real estate look like? Here’s what everybody’s favorite federal agency, the Internal Revenue Service, has to say:
Like-kind exchanges – when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or "like-kind" – have long been permitted under the Internal Revenue Code. Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received.
What kind of economic impact does this have? Per 1031 Builds America (a pro-1031 advocacy group): “Section 1031 like-kind exchanges play an important role in the U.S. economy: encouraging investment, contributing to federal, state and local tax revenue, reducing the use of leverage and improving liquidity in the market. From both the micro and macro views, the studies recommend the retention of Section 1031.”
The economist-authors of this study concluded that repealing the like-kind exchange deferral for real estate would cause:
- Real property transactions [to] decline, inhibiting the stream of economic activity generated by exchange transactions
- The cost of capital [to] increase
- Average holding periods [to] increase
- The velocity of investment in the economy would decrease
- Real estate values would drop
- Rents would rise
- The economy would contract
Real estate, of course, is a much bigger segment of the U.S. economy than crypto. Yet, crypto is nontrivial and similar impacts can be expected. As Nir Kaissar observed in July in a Bloomberg guest essay, Americans who lost money in the crypto crash could be attributing to a wider dour market sentiment.
“Since late 2021, cryptocurrencies have given up $2 trillion of market value, their global market cap plummeting by two-thirds to about $1 trillion. … I’m not suggesting that cryptocurrencies are solely or even mostly responsible for these broader economic trends, not least because it’s hard to pinpoint how much of the global crypto gains and subsequent losses can be attributed to Americans. But they are a factor, and possibly a big one,” Kaissar wrote.
See also: Top 5 Crypto Tax Questions, Answered
And if crypto could have an impact on public sentiment on the way down, so might making crypto holders happy have wider repercussions. After all, equitable prosperity is consistently at the top of voters’ concerns. As the Pew Charitable Trusts reported in November:
“In the October survey, about eight-in-10 registered voters (79%) say the economy is very important when making their decision about who to vote for in the 2022 congressional elections, the highest share saying this about any of the 18 issues the survey asked about.”
It therefore makes good sense to amend the tax code to allow deferral of realization of taxable gains on proceeds of crypto sales reinvested in other cryptocurrencies.
Let crypto and the U.S. economy flourish together. Defer taxation on crypto-to-crypto like-kind exchanges.