Cryptocurrency is generally considered a capital asset, and so gain from the sale of cryptocurrency triggers a capital gain.
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How can gains from the sale of cryptocurrency be deferred under QOZ rules?
Would this qualify as a capital asset?
Answers
Yes, cryptocurrency gains that are reinvested in a QOF within 180 days of realization are eligible for deferral and accompanying OZ benefits.
Capital gains from the sale of cryptocurrency are eligible for investment into an Opportunity Zone Fund. The same as any other capital gain. Be careful that you are not considered a dealer in cryptocurrency. If you are making a market in cryptocurrency and the trading of the currency is your regular trade or business, the gains will be gains from a trade or business and not eligible to invest in an Opportunity Zone Fund.
Cryptocurrency is a capital asset if it is not dealer property. Evaluating capital versus ordinary for cryptocurrency (as with real estate and other certain types of assets) is a complicated facts-based test. If you were generally holding cryptocurrency for mere investment, it's a capital asset, and gains from sale ought to be eligible for the OZ program.
Sales of cryptocurrency can create capital gains, and such gains are eligible for deferral through a Qualified Opportunity Zone Fund. The issues of custody of the cryptocurrency is made slightly easier with an OZ fund since only the capital gain and not all proceeds of a sale need to be contributed to a fund to obtain the deferral for federal tax purposes. There also is no direct tracing of dollars to the investment that could come from other funds apart from the exchange. Yes, capital asset so long as not in the business of buying and selling cryptocurrency.
If the gain realized is classified as capital gain or taxed as a capital gain, it will certainly qualify as an eligible gain. Whether it is a capital asset or not, it will require further analysis depending on who the owner is and the application of IRS publications on the topic.
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