[stakecounter]

Is the cost basis calculated by the US dollar value of each at the time of the exchange? Or based on the exchange rate of the two currencies?

Scenario:

1. I buy 1 ETH for 1 USD when rates are 1 ETH/USD, 2 ETH/BTC.

2. I trade 1 ETH for 1 BTC when rates are 2 ETH/USD, 1 ETH/BTC.

Option 1: I’ve incurred a loss, because the sale is reported as first a sale of ETH for USD, then a purchase of BTC at whatever the cost basis between BTC/USD.

Option 2: I’ve incurred a gain, because I traded directly from ETH to BTC, and the relative value between ETH and BTC has gone up.

[chollida1]

It's driven off whats called your dollar cost average.

So in your scenario

Buy 1 ETH for say $500, your cost base is $500.

If then trade the 1 ETH for bitcoin, it only depends on what ETH is worth at that moment.

If 1 ETH is now worth $400, then you have a $100 loss, if ETH is worth $500 then no taxable gain or loss, if 1 ETH is wroth $600 then you owe tax on $100 of capital gains.

What bitcoin is worth is irrelevant until you sell the bitcoin.

EDIT Just assume that every transaction between crypto currencies has an implicit, convert to USD first and then buy the other Crypto with USD.

Also, There is always a USD price, what the price is, is a bit of an art, but its what ever price you can convince the IRS of.

[gamblor956]

It's driven off whats called your dollar cost average.

This is wrong for cryptocurrency, at least for Bitcoin. Because bitcoin is an asset for tax purposes, each coin (meant here as any quantity of cryptocurrency, not a specific unit) is subject to an individual tax computation, so you must use the actual price paid for each coin as the basis for computing taxes. You must also compare each coin's basis against the actual selling price of that coin at the time sold.

Note that this is generally also how you calculate gains/losses related to foreign currencies.

[stakecounter]

Thanks - given your comment it sounds like option 1 mentioned above where gains are calculated based off of USD value even if the currencies are traded directly. But as another commenter mentioned, I don’t see how this can work because the trade doesn’t involve USD at all, and the exchange rate for USD/ETH may vary widely between exchanges. And for more niche cryptocurrencies, a USD value may not even exist because there are no trades between USD and that currency.

[newfoundglory]

> the trade doesn’t involve USD at all

Neither does buying pounds in euros, but you'll still calculate your taxes in USD.

[Spooky23]

This is where the magic of crypto money starts falling down. Normal money is legal tender, commodities are not.

[teawrecks]

At the end of the day, you're going to pay your taxes in USD. So yeah, the USD value does matter.

[jermaustin1]

It is the exact same as exchanging mutual funds at your brokerage.

Like an exchange I did just this morning: $10,000 VHDYX -> $10,000 VFIAX.

It creates two orders a sell and a buy. I'm taxed capital gains on the $10k sale (about $600 gain) and the buy has nothing to do with it, until I sell it in 5 years.

[icedchai]

The difference is brokerages will actually issue you a 1099 form. The crypto exchange sites won't.

Let's not kid ourselves... Nobody is going to be reporting crypto-to-crypto exchanges.

[xur17]

If you want to be compliant, and not commit tax fraud, you will. Just because it will require some effort to track you down doesn't make it ok.

[icedchai]

You and I may be compliant. The point is, most people won't.

[sebleon]

Saavy consumers will definitely evade this. However, this tax is likely targeted at finance companies looking to “get into crypto” and will do everything by the book

[wbl]

How many convictions will it take?

[justblendin]

https://en.wikipedia.org/wiki/Calculus_of_negligence

Premeditated tax-negligence is fraud according to the IRS, but the thinking remains.

How many convictions will it take? Depends on how much is on the line.

[gamblor956]

If you substantially understate[1] your income (including crypto-exchange income), the statute of limitations on your tax return never starts running. That means the IRS has until the end of time to audit you and assess penalties and back interest.[2]

[1] Currently that means excluding items individually or collectively worth more than 25% of the gross income actually stated on the return.

[2] If your omission of crypto-currency income is within 25% of your actual stated gross income, the IRS only has 6 years to audit you and assess penalties...unless they decide that the omission is a deliberate attempt to evade taxes, in which case the unlimited statute of limitations could apply.

[newfoundglory]

Wow, that's a lot of potential reward for someone inside the exchanges if they can put together some information to report to the IRS - https://www.investopedia.com/articles/taxes/09/reporting-tax...

[heisenbit]

It is not so that the ledger is encrypted.

[nonbel]

There is no sale for dollars involved in the OP's scenario. Is there an actual sell in your scenario or is it "virtual"?

[jermaustin1]

There is no "real" sell on Vanguard to go from one fund to another, but regulations require them to mark it as a sale, and to denote the cost basis of the sale.

[nonbel]

Interesting, thanks.

[notyourday]

It also will be marked-to-market

[jermaustin1]

Interesting, I have never heard that term. I'm pretty uneducated in finance. I just have done great on my Vanguard Mutual Funds, and I keep them going.

[sowbug]

Bartering is taxable as well. This was the case even before computers were invented. See, e.g., https://www.irs.gov/newsroom/bartering-produces-taxable-inco...

[saalweachter]

To use the programming lingo that I hope a majority of HN users still recognize, they're like a sequence point.

[jclardy]

Yeah, this is the confusing part for me - moving from BTC to other crypto. Also if it is based on USD price at the time of the transaction...then which one? Coinbase rates can be far different from other exchanges.

[an_account]

The lowest/highest one you can convince the IRS is valid.

[s73ver_]

The safest and simplest is probably the rate of the exchange you're using.

[dnautics]

Some exchanges don't have usd. Even for those that do, it takes about 30-90 minutes to typically move ~100k in assets from one currency to another, double that if you're going between two altcoins via Bitcoin. During that time the effective usd exchange can have nontrivial swings.

[s73ver_]

You go with the price when the transaction actually goes through.

[dnautics]

Which transaction? Moving money like that is not a single tx