Like-Kind Exchange and Crypto: Why 1031 Does Not Apply
Section 1031 has been limited to real property since the 2017 Act, so a crypto-to-crypto swap is a disposal. The pre-2018 position is a separate question.
The idea that swapping one cryptocurrency for another can be deferred as a like-kind exchange is one of the most persistent misunderstandings in crypto tax. It is also one of the most consequential, because acting on it means an entire trading history goes unreported.
The position is not ambiguous for current years. It was arguable for older ones, and that argument was never a strong one.
What Section 1031 Does
Like-kind exchange treatment lets a taxpayer defer gain when one asset is exchanged for another of like kind, rather than recognising it at the moment of the exchange. The gain is not forgiven; it carries into the basis of the asset received and surfaces on a later sale.
It is a deferral mechanism with strict requirements, and it was always narrower than the casual description suggests.
What Changed in 2017
The Tax Cuts and Jobs Act amended Section 1031 to apply only to exchanges of real property. The change took effect for exchanges made after the end of 2017.
Cryptocurrency is not real property. It is treated as property generally, which is why gains on it are capital gains, but the 1031 provision now reaches only real estate.
So for every year from 2018 onward, the question has a clear answer: a crypto-to-crypto swap is a disposal, full stop.
The Pre-2018 Question
Before that amendment, the provision covered a broader range of property, and some taxpayers argued that swapping one cryptocurrency for another qualified.
The IRS has addressed this in published guidance and concluded that it did not, reasoning that different cryptocurrencies differ in nature and character rather than being of like kind or like class. That guidance is the IRS position, not a court decision, but it sets out what the agency will assert.
Anyone carrying an unreported pre-2018 swap history is not in a position a general reference page can resolve. That needs a professional who can look at the specific facts and at whether the years in question remain open.
What a Swap Actually Is
Treating a swap as a disposal means two things happen at once.
The asset given up is disposed of at its fair market value at that moment. The gain or loss is that value less your basis in it, and the holding period determines whether it is short or long term.
The asset received is acquired at that same fair market value, which becomes its basis. A new holding period begins.
| Event | Disposal? | Basis of what you receive |
|---|---|---|
| Buying with cash | No | What you paid, plus fees |
| Swapping token A for token B | Yes, of A | Fair market value of B at the swap |
| Selling for cash | Yes | Not applicable |
| Paying for goods with crypto | Yes | Not applicable |
| Moving between your own wallets | No | Unchanged |
| Receiving a gift | No | Carryover from the giver, with rules |
The row that surprises people is the third, and it is the whole subject of this page. The row that surprises them second is the fourth: spending crypto is a disposal too.
Why This Matters More Than It Looks
Someone who trades actively between tokens and believes swaps are deferred can accumulate a very large number of unreported disposals in a single year, while never having taken a dollar off an exchange.
The tax arises on the swaps regardless of whether cash was ever withdrawn. That mismatch, a liability with no cash generated to meet it, is the situation this misunderstanding produces.
Records
Because each swap is a disposal, each one needs a date, the value at that date, the basis of the asset given up, and the resulting gain or loss.
Exchanges issue forms with varying completeness and frequently no basis at all, and decentralised venues issue nothing. The chain holds the transactions but not the values, which have to be applied from a price source at the time of each swap.
This is the practical case for tracking software, not because the rule is complicated but because the volume is. See crypto tax software for what these do and where they struggle, and cost basis methods for identifying which units were disposed of.
What People Get Wrong About This
The first mistake is believing the deferral still exists. It was narrowed to real property, and no later provision restored it for digital assets.
The second is treating the pre-2018 argument as settled in the taxpayer’s favour. It was a position some took, the IRS has said it does not accept it, and it is not a safe assumption.
A third is thinking that staying inside one exchange, or inside one wallet, means no disposal occurred. The venue is irrelevant; the disposal is the exchange of one asset for another.
A fourth is assuming a stablecoin swap is not a disposal because the value did not change. It is still a disposal of the asset given up, and the gain or loss on that asset is recognised even though what you received is priced steadily.
And the last is assuming the rule is the same everywhere. Section 1031 is United States law. The treatment of a swap varies by country, so check your local rules rather than carrying this page’s answer across a border.
Where This Sits
The rest of the picture is in crypto tax basics for how gains are computed and capital gains on crypto for the holding period distinction. Nothing on this site is tax advice, and a trading history with unreported swaps is a situation to take to a professional rather than to resolve from a reference page.
Common questions
Does Section 1031 apply to cryptocurrency?
No. The Tax Cuts and Jobs Act of 2017 narrowed like-kind exchange treatment to exchanges of real property, effective for exchanges after the end of 2017. Digital assets are not real property, so a crypto-to-crypto swap does not qualify and is a disposal of what went in.
Was it allowed before 2018?
That is genuinely a separate question and it was never settled in the taxpayer's favour. Some argued the treatment applied to pre-2018 swaps, and the IRS has taken the position in published guidance that it did not, on the basis that different cryptocurrencies are not of like kind or class. Anyone with an open pre-2018 position needs professional advice rather than a general page.
Is swapping one token for another a taxable event?
In the United States, yes. The token you gave up is disposed of at its fair market value at that moment, and the gain or loss is the difference between that and your basis in it. The token received takes that fair market value as its new basis.
What about swapping inside a decentralised exchange?
The venue does not change the analysis. A swap executed through a smart contract is still a disposal of one asset and an acquisition of another. The practical difference is that no exchange issues a form, so the records have to come from the chain.
Does this apply outside the United States?
Section 1031 is United States law and has no application elsewhere. Other countries treat crypto-to-crypto disposals in their own ways, and several do treat every swap as a disposal under their general capital gains rules. Check the rules where you are tax resident.
Read next
- How Crypto Is Taxed: The Events That Count Learn which crypto transactions create a tax liability and which don't. Rules vary by country, so know what to check for your jurisdiction.
- Mining Tax: What Counts as Income and When Learn how mining crypto creates taxable income at receipt and again at disposal, plus the hobby vs. business distinction that changes deductions.
- Form 8949 for Crypto: Which Form Carries What 8949 carries the line-by-line disposals, Schedule D the totals, and income goes elsewhere entirely. Why exchange forms so often show no basis.
- How Rug Pulls Work: The Mechanics, Not the Moral Liquidity removed, a mint function left open, or a tax that permits buying but not selling. What can be checked beforehand and what genuinely cannot.
- What a Hardware Wallet Will Not Protect You From Hardware wallets secure private keys, but they don't protect against all threats. Learn what they can't do and how to cover those gaps.