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Crypto And §1031 – Still Relevant In California!

Crypto And §1031 - Still Relevant In California!
In 2019, California only partially conformed to the section 1031 changes made by the Tax Cuts and Jobs Act. For individuals below specified AGI levels in the year an exchange begins, the pre-TCJA version applies. These levels are under $500,000 of AGI for MFJ and HH and under $250,000 for single.
Besides real property, what might individuals exchange? Well today, the most common non-real property exchanged by the roughly 95% of Californians who are still subject to section 1031 is cryptocurrency! Many types of virtual currency can only be acquired with bitcoin or another virtual currency.
Of course, few people are dealing with virtual currency, but the number grows each day.
What are the factors that should be considered to know if one virtual currency held for investment or business is like-kind to another?

Recently, Roger RoyseJames Creech and I, wrote a paper for the California Lawyers Association Taxation Section’s Sacramento Delegation project. We presented it to FTB and legislative staff on October 15. The paper provides background on section 1031 and intangibles including CCA 202124008 where the IRS found that these exchanges are not like kind: BTC and ETH, BTC and LTC, and Ether and LTC. We don’t agree with the BTC and LTC conclusion as both run on the blockchain and LTC was designed based on BTC.
Our paper suggests some factors to consider and we request that the FTB provide guidance to help individuals and practitioners deal with section 1031 and virtual currency. This is an important issue given that section 1031 is a mandatory provision and there are frequent exchanges of virtual currency held for investment.
Of course, another solution is for California to completely conform to federal section 1031. That would be simpler.
You can find the paper here.
What do you think?  Professor Annette Nellen.
Comments very welcome.

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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