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Author Topic: [US IRS] Crypto-to-crypto swaps create tax events... what?  (Read 58 times)
fcode
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November 04, 2019, 05:14:57 PM
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I can't make sense of the IRS requirements.

If I trade BTC for ALT and ALT only has value in BTC (ie. a net zero transaction), what do I owe tax on?

And if I trade that ALT back to BTC I owe tax AGAIN on the same thing I already paid tax for.  Huh
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November 04, 2019, 11:09:01 PM
Merited by Foxpup (3), vapourminer (1), hugeblack (1)
 #2

I can't make sense of the IRS requirements.

If I trade BTC for ALT and ALT only has value in BTC (ie. a net zero transaction), what do I owe tax on?

BTC always has an equivalent USD value so these aren't "net zero" transactions.

when you buy altcoins with BTC, the IRS considers it to be 2 transactions:
1. sell BTC for the equivalent amount of USD
2. buy altcoins with that USD

you are expected to calculate the USD value of BTC at the time of the altcoin trade to determine the cost basis of your altcoin position.

And if I trade that ALT back to BTC I owe tax AGAIN on the same thing I already paid tax for.  Huh

nope. when you bought the altcoin, you were selling BTC. that's what you paid tax on already. when you sell the altcoin, it's a different taxable transaction entirely.

oversimplified example:
-let's say you bought 1 BTC for 10000 USD. then you sold that 1 BTC for 100 GGC when BTC was worth 15000 USD. you owe tax on the 5000 USD gain.
-your 100 GGC has a cost basis of 15000 USD (150 USD each). let's say you sell them for 2 BTC when BTC is worth 20000 USD. you now owe tax on a 25000 USD gain.

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November 05, 2019, 09:36:14 PM
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That's insane to owe tax on unrealized profit. It basically makes it impossible to make money trading unless you immediately cash all profits out to fiat. Otherwise you could end up owing tax when BTC was at a way higher mark than you could currently cash out to pay the tax you owe. Totally stupid.

The rule should simply be you owe tax on any coin-to-fiat conversion. Simple and easy for everyone.
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November 06, 2019, 08:04:50 PM
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Apparently the IRS doesn't wan't you to only compute the total capital gains/loss you have during that year's taxing period, the IRS wants you to cover each transaction you make on the coin's current market value during the exchange is being made. I think they are doing this for accuracy and of course they want to cover every transactions you have whether or not you are earning anything from each trade you do. Yeah it makes everything complicated but you don't technically owe taxes on each transaction you do, if your trade resulted to losses then you don't have any taxes but if it results to a gain then it is taxable depending on what bracket you are on.

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November 07, 2019, 06:39:18 AM
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That's insane to owe tax on unrealized profit.

it's not really unrealized profit though.

in the above example, you started with 10000 USD, but then you put 15000 USD worth of capital into the altcoin trade. how could you do that without realizing any profit?

i wish altcoin trades were tax exempt like-kind exchanges but the tax code says they explicitly aren't.

It basically makes it impossible to make money trading unless you immediately cash all profits out to fiat. Otherwise you could end up owing tax when BTC was at a way higher mark than you could currently cash out to pay the tax you owe.

that shouldn't really matter because it means you are sitting on massive unrealized losses on your BTC holdings. you could offset your tax liabilities by realizing some/all of those losses in the same tax year. in fact, this may be an underlying reason why BTC crashed in december 2013 and december 2017, the last two bubbles.

best to plan for taxes on an ongoing basis throughout the tax year. if it's an afterthought at the end of the year or the following april, it can be a real headache.

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