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Comment by nugget | Hacker News Reader

You also owe taxes if you exchange one digital currency for another, e.g. BTC for ETH, equivalent to if you had sold the BTC for USD.

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not necessarily, the IRS declared cryptoassets to be "property", which is inadvertently subject to like-kind tax treatment unless a specific exception is made, which has not been made.

"cryptographic hash inputs" which are colloquially called cryptocurrencies are functionally similar, and are subject to like-kind until a specific exception is made.

the IRS inadvertantly made altcoins the biggest potential tax shelter in history.

How does that make sense? If I have $1000 of BTC and exchange it for $1000 of ETH, why would I ever need to pay taxes on that?

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.

There's also in-kind redemptions for exchange traded funds.

It's not that clear-cut.

The IRS does specifically state that 1031 exchanges don't apply to stocks or "securities of indebtedness" (bonds), or to personal property.

1031s are for property held for use in a business or for investment.

It's not just real estate. People use 1031 exchanges to defer taxes on artwork, collectibles, boats and commodities.

BTC and ETH aren't stocks and they're not "securities of indebtedness". The matter isn't settled.

Here's the IRS's statement on what's excluded: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-c...

> You can't tax-free swap Facebook stock for Amazon stock,

You must convert to USD first to swap stocks. With crypto you don't have to.

> they end up owing more in taxes than they are worth

That's bizarre and punitive, and does not seem to be consistent with a fair system.

Of course that's not true. All you must do is find a counterparty willing to take Facebook stock as payment for Amazon stock. (I am not aware of any exchange listing such a contract, but it's certainly possible over the counter.) And if you do, you will have to pay taxes on the gain and will have a new cost basis in your Amazon stock.

With a few exceptions (like-kind exchanges come to mind), you owe the capital gains tax when you dispose of the property. That you continue to take on market risk afterwards does not enter into it.

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

I believe for this to be a 1031 you would need a qualified intermediary to handle the USD portion. Once you touch the funds, you've broken the exchange.

If I buy BTC with USD, then later convert those BTC to ETH, how do I calculate my profit? Is it based on the difference between my initial purchase of USD and the USD-equivalent value of those ETH? That doesn’t seem to make sense.

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.

Can you trade GOOG -> AAPL without first converting to USD (i.e. selling the GOOG stock and then buying AAPL stock)?

that doesn't make sense. so basically if you trade BTC for ETH for BTC for USD you have to pay taxes 3 times on the same money?

> 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.

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