Legal Definitions - sale or exchange

A sale or exchange refers to the voluntary transfer of property from one party to another in return for something of value, rather than as a gift. This transaction typically results in a taxable gain or loss for the party transferring the property, which must be recognized for federal tax purposes. It can involve exchanging property for money, or exchanging one type of property for another.

Here are some examples illustrating a sale or exchange:

• Selling a Rental Property: Imagine a landlord, Mr. Henderson, decides to sell one of his rental houses for $400,000. He originally purchased the house for $250,000.

  This is a sale or exchange because Mr. Henderson voluntarily transferred ownership of his property (the rental house) to a buyer in return for money ($400,000). The difference between his purchase price and sale price would result in a recognized taxable gain for federal tax purposes.

• Trading Business Equipment: A small business owner, Ms. Chen, trades in her old delivery van, valued at $15,000, to a dealership for a newer, more fuel-efficient model, paying an additional $20,000 in cash.

  This illustrates an exchange because Ms. Chen voluntarily transferred her old delivery van in return for a newer van and also provided cash, both of which represent value. This transaction would typically result in a recognized gain or loss for tax purposes, depending on the tax basis of the old van and the value of the new one.

• Selling Cryptocurrency: Sarah decides to sell a portion of her cryptocurrency holdings, which she bought several years ago, for U.S. dollars.

  This is a sale or exchange because Sarah voluntarily transferred her digital property (cryptocurrency) in return for money. The difference between what she paid for the cryptocurrency and what she received when selling it would be a recognized gain or loss for tax purposes.