The Token Taxonomy Act, introduced by Rep. Warren Davidson, R-Ohio, on Dec. 20, 2018, would treat so-called "trading pair" exchanges of virtual currency, where one cryptocurrency is exchanged for another cryptocurrency, as tax-free exchanges.1
Prior to 2018, many holders of virtual currency took the position that exchanges of one token for another qualified as a tax-free exchange of like-kind property under pre-tax reform rules (pre-2018 Section 1031 of the U.S. Tax Code). In certain ways, the rules could be flexible by focusing on like-kind asset classes, rather than on similar value.
This approach was applied to certain financial assets, such as an exchange of gold bullion for Canadian Gold Maple Leaf coins, and an exchange of one bundle of patents for another.
The 2017 Tax Cuts and Jobs Act changed the like-kind exchange rules. They now only apply to exchanges of real property. The Token Taxonomy Act would permit the tax-free exchange of virtual currency (in addition to real property), and apply to post-Jan. 1, 2017, exchanges.
All cryptocurrency assets are not created equal. Some may even fall into another bucket all together and be outside of what the bill treats as a crypto asset from a U.S. tax perspective. This is because labels mean little in tax law, and some tokens, particularly securitized tokens, may be treated as actual ownership in the underlying reference assets. In such an instance, the token could even be outside of the protection offered by the new bill.
1 The proposed legislation would also exclude up to $600 of gain when virtual currency is sold or exchanged for cash or cash equivalents.
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