Back in September 2017 I wrote a piece titled, “Can You Use a §1031 Exchange to Defer Gain with Cryptocurrency?” The conclusion I drew was, “[M]ost exchanges of one cryptocurrency for another do not qualify as §1031 exchanges and it’s more likely than not that the IRS will rule that two different cryptocurrencies are not eligible for like-kind treatment.” Do note that after December 2017 you can only use a §1031 like-kind exchange for real property, so today the answer is clearly no.
It’s likely some taxpayer was audited on this issue by the IRS, and the auditor asked the Chief Counsel’s Office for whether a like-kind exchange (aka a §1031 exchange) was allowed for cryptocurrency. The Chief Counsel’s Office issued a memorandum that for Ether (ETH) from Bitcoin (BTC), Bitcoin for Litecoin (LTC), and Ether for Litecoin, the answer is no. The Chief Counsel’s office looked at the underlying character of the cryptocurrencies and found them to be different and, thus, not qualifying for a like-kind exchange.
While it’s nice to have my conclusion verified, this is now fairly irrelevant. As I noted above, today you can only do a §1031 like-kind exchange for real property. There are few taxpayers who will be impacted by this given that generally 2017 returns are beyond the statute date.