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You typically aren't allowed to tax-free swap one asset for a different asset, even if the assets are of the same type. You can't tax-free swap Facebook stock

by nugget 9y ago

You typically aren't allowed to tax-free swap one asset for a different asset, even if the assets are of the same type. You can't tax-free swap Facebook stock for Amazon stock, for example, or a gold coin for silver coins of equivalent market value. There are a very few exceptions, such as in real estate where you can do what's called a "like kind" 1031 exchange, or with corporate mergers and acquisitions where you can do a tax-free re-organization, but all of these exceptions require specific contemporaneous paperwork to be filed. This isn't much of a problem because BTC and ETH are close to all-time highs, but in theory you can see how somebody could exchange BTC for ETH, ETH plummets, and they end up owing more in taxes than they are worth. A similar scenario occurred after the dot-com crash in 2001.

panarky 9y ago
It's not that clear-cut. The IRS does specifically state that 1031 exchanges don't apply to stocks or "securities of indebtedness" (bonds), or to personal property. 1031s are for property held for use in a business or for investment. It's not just real estate. People use 1031 exchanges to defer taxes on artwork, collectibles, boats and commodities. BTC and ETH aren't stocks and they're not "securities of indebtedness". The matter isn't settled. Here's the IRS's statement on what's excluded: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031 https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-c...
ThrustVectoring 9y ago
There's also in-kind redemptions for exchange traded funds.
ahallock 9y ago
> You can't tax-free swap Facebook stock for Amazon stock, You must convert to USD first to swap stocks. With crypto you don't have to. > they end up owing more in taxes than they are worth That's bizarre and punitive, and does not seem to be consistent with a fair system.
- sdkmvx 9y ago
  Of course that's not true. All you must do is find a counterparty willing to take Facebook stock as payment for Amazon stock. (I am not aware of any exchange listing such a contract, but it's certainly possible over the counter.) And if you do, you will have to pay taxes on the gain and will have a new cost basis in your Amazon stock. With a few exceptions (like-kind exchanges come to mind), you owe the capital gains tax when you dispose of the property. That you continue to take on market risk afterwards does not enter into it.

by nugget 9y ago

panarky 9y ago

It's not that clear-cut. The IRS does specifically state that 1031 exchanges don't apply to stocks or "securities of indebtedness" (bonds), or to personal property. 1031s are for property held for use in a business or for investment. It's not just real estate. People use 1031 exchanges to defer taxes on artwork, collectibles, boats and commodities. BTC and ETH aren't stocks and they're not "securities of indebtedness". The matter isn't settled. Here's the IRS's statement on what's excluded: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031 https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-c...

ThrustVectoring 9y ago

There's also in-kind redemptions for exchange traded funds.

ahallock 9y ago

> You can't tax-free swap Facebook stock for Amazon stock, You must convert to USD first to swap stocks. With crypto you don't have to. > they end up owing more in taxes than they are worth That's bizarre and punitive, and does not seem to be consistent with a fair system.

sdkmvx 9y ago
Of course that's not true. All you must do is find a counterparty willing to take Facebook stock as payment for Amazon stock. (I am not aware of any exchange listing such a contract, but it's certainly possible over the counter.) And if you do, you will have to pay taxes on the gain and will have a new cost basis in your Amazon stock. With a few exceptions (like-kind exchanges come to mind), you owe the capital gains tax when you dispose of the property. That you continue to take on market risk afterwards does not enter into it.