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TAX CLINIC

were the most regarded cryptocurrencies and taxpayers need to be vigilant to recovery period, using the alternative
and served as an “on and off ramp” be- avoid misreporting. depreciation system (ADS), and certain
cause taxpayers often needed to purchase Besides increased information other taxpayers with qualified residential
bitcoin or ether before being able to reporting under the recently enacted living facilities to be eligible for the real
purchase another coin, such as litecoin. Infrastructure Investment and Jobs Act, property trade or business election. Both
The IRS also concluded that bitcoin additional rules may follow that affect of these developments create favorable
and ether were not like-kind property the tax consequences of transactions opportunities for affected taxpayers, who
because of their differences in overall involving cryptocurrencies. For example, may want to reevaluate their current
design, intended use, and actual use. as of this writing, proposed legislation status and make a change.
As noted above, the ILM’s conclu- in Congress would extend the applica-
sions related to specific exchanges of tion of both Sec. 1091 wash sales and Background
bitcoin, ether, and litecoin before the en- Sec. 1259 constructive sales to digital The law known as the Tax Cuts and
actment of the TCJA. Taxpayers should assets. Therefore, it would be prudent for Jobs Act (TCJA), P.L. 115-97, enacted a
be cognizant that the TCJA generally taxpayers to monitor potential legislation limitation on how much interest expense
precludes like-kind exchange treatment that could affect the tax consequences of a taxpayer can deduct each year, known
for post-TCJA cryptoasset trades. cryptocurrency transactions. as the Sec. 163(j) interest limitation.
From Denise Reyes, J.D., LL.M., The TCJA, however, allowed certain
Prospective considerations Washington, D.C. taxpayers that make a real property trade
Taxpayers who have transactions in or business election to be exempt from
cryptoassets should anticipate and applying the Sec. 163(j) interest limita-
closely monitor future developments Interest Income & Expense tion. The TCJA defines an electing real
from Treasury and the IRS. Treasury property trade or business by reference
has voiced concerns about cryptoassets Opportunities for taxpayers to Sec. 469(c)(7)(C), which defines a
posing a tax evasion risk, the need for with residential rental real property trade or business as any
stricter cryptoasset compliance with the properties and residential real property development, redevelop-
IRS, and its intention to crack down on living facilities ment, construction, reconstruction,
cryptocurrency markets and transactions. During 2021, the IRS issued a series acquisition, conversion, rental, operation,
Since 2009 when bitcoin emerged, of taxpayer-favorable procedures that management, leasing, or brokerage trade
numerous cryptoassets (e.g., platform allow certain taxpayers that have made or business.
tokens, utility tokens, and transac- the real property trade or business As a trade-off, electing taxpayers are
tional tokens) have been created, adding election under Sec. 163(j)(7)(B) with required to depreciate their nonresi-
complexity to determining the proper residential rental property to depreciate dential real property, residential rental
tax treatment. such property using the shorter 30-year property, and qualified improvement
The IRS aspires to increase tax rev-
enues by focusing on cryptoassets, and
taxpayers holding these assets must take
the appropriate steps to ensure they
have fulfilled all their tax-compliance
obligations so that they are not penal-
ized. The IRS has augmented enforce-
ment efforts related to cryptoassets,
including increasing efforts to serve
John Doe summonses (i.e., an IRS
summons, authorized by Sec. 7609(f),
in which the name of the defendant is
unknown to the plaintiff at the time
of issuance and is added after service)
on cryptocurrency exchanges in order
to expose noncompliant taxpayers. IMAGE BY BIM/ISTOCK
The IRS is making a concerted effort
to tax and regulate these transactions,

22 February 2022 The Tax Adviser