Only 802 People Paid Taxes on Bitcoin Profits, IRS Says

> I paid capital gains on my sale of 325 BTC and used the profits to buy a Butterfly Labs Monarch mining machine.

Did I miss something?

I do pay my taxes. But I can't help but think there's a less intrusive way to fund the government.

Lucky! Currency would have a lot worse tax implications.

> so basically if you trade BTC for ETH for BTC for USD you have to pay taxes 3 times on the same money?

No, on the BTC -> ETH transaction, your capital gain is the difference between the dollar-equivalent cost of the ETH at the time of the trade and the dollar-equivalent cost of the BTC at purchase.

On the ETH to BTC transaction, it's the same thing, with “ETH” and “BTC” reversed (for the “new” BTC).

On the BTC to USD transaction, it's the actual quantity of dollars minus the dollar-equivalent cost of the BTC at the previous transaction.

In each transaction, you pay taxes on the net gain from the prior transaction. You don't pay taxes on the same income more than once.

if you had purchased the BTC at $20, you now owe taxes on $980 of realized gain. Once you've paid that, your new (tax) basis in ETH is $1000, so you can do whatever you want with it (including exchange it to USD) if the value doesn't change.

You typically aren't allowed to tax-free swap one asset for a different asset, even if the assets are of the same type. You can't tax-free swap Facebook stock for Amazon stock, for example, or a gold coin for silver coins of equivalent market value. There are a very few exceptions, such as in real estate where you can do what's called a "like kind" 1031 exchange, or with corporate mergers and acquisitions where you can do a tax-free re-organization, but all of these exceptions require specific contemporaneous paperwork to be filed.

This isn't much of a problem because BTC and ETH are close to all-time highs, but in theory you can see how somebody could exchange BTC for ETH, ETH plummets, and they end up owing more in taxes than they are worth. A similar scenario occurred after the dot-com crash in 2001.

This could be a 1031 like-kind exchange [0] and non-taxable if you weren't in "constructive receipt" of USD (sold BTC for USD, then later bought ETH with the USD).

IANATL, YMMV, consult a professional, etc.

[0] https://en.wikipedia.org/wiki/Like-kind_exchange

Yes, that is exactly how it works.

When I buy GOOGL for $400/share, then trade it for APPL at a 1:5 ratio, if APPL on the day of the trade goes for $100/share, then my cost basis for GOOGL is $500/share.

Otherwise, there would be an obvious tax loophole where instead of paying taxes on my gains in GOOGL, I'd trade it for another stock, then instantly sell the new stock (Which made no gains between me acquiring it, and selling it.)

Just because I'm investing into magic internet money doesn't mean I shouldn't pay taxes on gains.