[US IRS] Crypto-to-crypto swaps create tax events... what?

[fcode]

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. 

[1715262436]

1715262436

[figmentofmyass]

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.  

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.

[fcode]

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.

[Harlot]

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.

[figmentofmyass]

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.

[ulhaq]

That's insane to owe tax on unrealized profit.

it's not really unrealized profit though.

But that is semantics and depends on your definition of what is realized. Imagine you buy a house for $50000 and it is later valued by an appraiser at $70000. Is that a realized gain? Probably you would say no.

Let's say you trade that house for another house that is selling for $70000. Now is it realized? All you have is a house, you don't have an extra $20000 in cash. But if it is realized, then you have to come up with the cash from somewhere to pay your taxes. The only difference with crypto is that it is liquid and easier to sell part of it. But ease of selling has nothing to do with realization. Trading the house for a more valuable house is realized just as much as a crypto for crypto trade is realized.

In any case, the IRS has never stated that crypto to crypto is taxable. It stated that exchange of virtual currency for property is taxable.

[figmentofmyass]

That's insane to owe tax on unrealized profit.

it's not really unrealized profit though.

But that is semantics and depends on your definition of what is realized. Imagine you buy a house for $50000 and it is later valued by an appraiser at $70000. Is that a realized gain? Probably you would say no.

indeed, the gain is unrealized because you haven't disposed of the property.

Let's say you trade that house for another house that is selling for $70000. Now is it realized? All you have is a house, you don't have an extra $20000 in cash. But if it is realized, then you have to come up with the cash from somewhere to pay your taxes. The only difference with crypto is that it is liquid and easier to sell part of it.

real property qualifies for like-kind exchanges under the USA tax code, which are tax exempt. cryptocurrency does not qualify for like-kind exchanges.

In any case, the IRS has never stated that crypto to crypto is taxable.

they have stated that cryptocurrency is taxable as property. property to property transactions are taxable unless they qualify as like-kind exchanges.

prior to 2018, it was arguable whether crypto to crypto transactions could be like-kind exchanges. the new 2018 tax code specifically limited like-kind exchanges to real property, so there is no longer any ambiguity.

[ulhaq]

That's insane to owe tax on unrealized profit.

it's not really unrealized profit though.

But that is semantics and depends on your definition of what is realized. Imagine you buy a house for $50000 and it is later valued by an appraiser at $70000. Is that a realized gain? Probably you would say no.

indeed, the gain is unrealized because you haven't disposed of the property.

Let's say you trade that house for another house that is selling for $70000. Now is it realized? All you have is a house, you don't have an extra $20000 in cash. But if it is realized, then you have to come up with the cash from somewhere to pay your taxes. The only difference with crypto is that it is liquid and easier to sell part of it.

real property qualifies for like-kind exchanges under the USA tax code, which are tax exempt. cryptocurrency does not qualify for like-kind exchanges.

In any case, the IRS has never stated that crypto to crypto is taxable.

they have stated that cryptocurrency is taxable as property. property to property transactions are taxable unless they qualify as like-kind exchanges.

prior to 2018, it was arguable whether crypto to crypto transactions could be like-kind exchanges. the new 2018 tax code specifically limited like-kind exchanges to real property, so there is no longer any ambiguity.

Sorry, I chose a bad example. Replace house above with "digital house." So the 2nd example I gave, now suddenly it is taxable. But there is still no extra $20,000. You cannot sell a fraction of a digital house (in most virtual worlds).

Are 2 different files on your computer different properties? The IRS has not spelled this out. 

[ulhaq]

Also look at the terms used in the IRS document you linked. All of the examples they give involve "virtual currency" (their term) and "other property" (their term, emphasis mine). All the examples they give also involve virtual currency and real property. They never discuss exchange of virtual currency for virtual currency. Why does the IRS specify "other property" instead of "property"?

Like-kind was always specifically spelled out by the IRS. From examining the documentation on like-kind, it was always clear that it never applied to crypto. That does not mean anything for when crypto was invented, because obviously it was after like-kind was introduced. So one cannot expect that like-kind would apply to something that hadn't been invented yet. The IRS understanding of crypto would also have been rudimentary in 2014, so one can expect that they might not have considered all the possibilities, or even understood crypto.