TAX REFORM ON 1031 | CRYPTOCURRENCY AND REAL ESTATE INVESTORS

Personalty property assets can no longer be exchanged include intangibles, such as broadband spectrums, fast-food restaurant franchise licenses and patents; aircraft, vehicles, machinery and equipment, railcars, boats, livestock, artwork and collectibles. Transition rules permit a personal property exchange to be completed in 2018 if either the relinquished property was sold or the replacement property was acquired by the taxpayer during 2017.

Full expensing, that also came as the result of the Tax Cut and Jobs Act (100% Bonus Deduction). The full cost of tangible business use personal property assets such as heavy equipment, farm machinery, vehicles and hotel furniture can be written off in the year that they are placed in service by the taxpayer. Although tax can no longer be deferred through like-kind exchanges for these assets, the full expensing deduction can be used to offset any capital gain or depreciation recapture recognized in that same or future years. Full expensing is temporary; it will expire in 2022, and will be reduced to 80% for assets placed in service in 2023, 60% for 2024, 40% for 2025 and 20% for 2026. This deduction applies to both new and used assets acquired by the taxpayer.

EFFECT CRYPTOCURRENCY INVESTORS

Generally, Cryptocurrency tax treatment remained unchanged from previous law. Cryptocurrency traders must report income, both domestic and foreign, and capital gains from all digital currencies, including Bitcoin; they may also need to file an FBAR. In the case that the currency is traded on platforms outside the United States. Trading virtual currencies may result in capital gains, and when it does, a taxpayer must pay taxes on those capital gains—the rate being determined by the duration of their holding of the cryptocurrency, of course. Those capital gains that are short-term are typically taxed like income at ordinary rates, while capital gains on assets that were held in excess of one year are considered to be long-term gains, and are taxed at lower tax  brackets.

However, in the Tax Cut and Jobs Act, Congress eliminated Section 1031 for all types of property except for real estate. Since it is clear that bitcoin and other Cryptocurrency is not real estate,  bitcoin and other cryptocurrency does not qualify for like-kind exchange under Section 1031. Unlike under previous law, currency generally did not qualify for like-kind exchange on Section 1031 exchange, however bitcoin generally was considered to be property, not currency, for tax purposes. The debate about whether bitcoin qualified for Section 1031 has revolved around determining what type of property bitcoin is. If bitcoin and other cryptocurrency were considered personal property, then it might potentially have qualified for Section 1031 Exchange.

Because Failure to file FBAR penalties are so large. Here is a quick reminder on what penalties can occur if a filing is missed and when a requirement exists for filing.

The penalties for failure to file an FBAR are worse than tax penalties. Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation—and each year you didn’t file is a separate violation.

Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.

Moreover, the assessment of a civil penalty does not preclude criminal penalties or prosecution.

So what are the requirements to file an FBAR?

All U.S. persons with foreign bank accounts must also file a Treasury Department Form for an FBAR.  You must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year. Since criptocurrency is considered currency having an aggregate value that exceeds $10,000 at any time during the year even if no taxable transaction has occurred, the balance of the criptocurrency account must be reported.