Strategies still exist to monetize a position in crypto without triggering current taxable gain or loss, as a recent case shows: Estate of McKelvey v. Commissioner (906 F.3d 26, 2nd Cir. 2018).

Many people historically have sought to diversify their crypto holdings by exchanging one cryptoasset for another. Some people sought to avoid recognition of taxable income by taking the position that the exchange of cryptocurrencies was exempt from current taxation under the "like kind exchange" rules. However, that's no longer possible, due to 2017 tax law changes.

Nevertheless, a number of common law doctrines continue to exist that permit current monetization without current taxable income. One example is illustrated by the transaction undertaken by the founder of the Monster.com website, Andrew McKelvey (McKelvey). McKelvey had substantial appreciation in his shares, and he sought to monetize that value without triggering current taxable gain by entering into variable prepaid forward contracts (VPFCs).

Under VPFCs, a buyer of the shares agrees to make an upfront payment for the right to receive at a future date a maximum amount of the designated assets or their cash equivalent. The exact number to be delivered, however, would be determined by a minimum price and a maximum price that limit the amount of property to be delivered in the future.

As security for performance, the buyer gives the seller cash up front, effectively "monetizing" the shares upfront. In turn, the seller receives the maximum amount of assets at a future date that the buyer may have to deliver. Custodians can be involved to minimize performance and execution risks.

The IRS did not take issue with the fact that the VPFCs of McKelvey were effective in allowing the taxpayer to monetize his position. Rather, the IRS said that McKelvey's modification of the VPFCs by extending their settlement dates shortly before delivery was effectively an event that triggered taxable gain. The appellate court agreed.

As trading activity in cryptoassets increases, taxpayers seek to monetize positions without triggering taxable gains or losses. Traders also seek to enter into different forms of "long" and "short" positions to profit from market movements. VPFCs are among the established tools that can be used to achieve these goals in the crypto space – just like they have been for other asset classes.

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