In 2019, California only partially conformed to the section 1031 changes made by the Tax Cuts and Jobs Act. For individuals below speified 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 Royse, James 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?  Comments very welcome.