[davidgh]

One of the tax implications I’ve often thought about is those that heavily trade among different cryptos.

If I buy $10k of Intel, it grows to $15k and I sell it to buy $15k of Google, I owe tax on the $5k gain.

Now, perhaps one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade. The IRS generally doesn’t like someone to be able to trade assets without recognizing a gain, otherwise it breaks down the fundamental framework upon which the entire tax system is based. The law provides a few provisions for tax free trades, but they are specifically prescribed by the tax law, such as a 1031 exchange between real estate holdings.

If you’ve heavily traded between cryptos over the past year with massively appreciating values, I would be worried that the IRS would claim you should have recognized a tax gain with every trade. For some, the ramifications for such a perspective could be huge.

[krrrh]

It isn’t 100% clear because there hasn’t been an explicit ruling from the IRS but it’s very unlikely that crypto to crypto would be considered a 1031 like-kind trade. They didn’t even allow trades between precious metals or gold coins with different grades of gold to qualify.

I think the bigger issue for US taxpayers is that the IRS doesn’t allow individuals to carryback losses. From what I’ve read, corporations in the US and individual taxpayers in Canada can carry back losses for up to 3 years. The way the crypto market exploded up until late Dec, and then has crashed hard since then could leave some traders with a big tax liability from 2017 that they could end up having to work off for years. The good news is that they might be able to carry 2018’s losses forward to offset future capital gains, but that could be cold comfort to the kids that lost it all on leverage when the bubble popped.

IANAA IANAL, seek professional advice.

[jmalicki]

As of 2018 it's now statute that it's not a like-kind trade, for 2017 it's still uncertain.

[krrrh]

Yes, I should have stated that more clearly. I’d also clarify that for 2009-2017 it’s still uncertain.

I still wouldn’t hold my breath.

[bpicolo]

> I would be worried that the IRS would claim you should have recognized a tax gain with every trade

They explicitly do consider crypto-to-crypto transactions as a taxable event now, as of the recent tax bill. You are required to pay taxes on it.

[sp332]

But that's new with the new tax bill. It wouldn't apply to 2017 taxes.

[mathgeek]

1031 exchanges are indeed explicitly only for real estate starting in 2018. For 2017, it's best to consult a tax professional as the rules are somewhat unclear.

[asah]

This is correct.

[redspectre]

The problem is, USD is the only legal tender. When I sell Intel stock, that where I made profit in USD. I pay tax on that. But if I trade BTC for DOGE, I haven't made any money. All I have done is swap tokens. And just because someone would pay X dollars for tokens, doesn't mean I made any money.

I mean where does it end? If I tell you I'll pay you 10000 dollars for the pocket lint in your pocket, did you just make a gain of 10k? Do you now owe the IRS 10k? If you haven't actually made any legal tender, how can you be taxed on a trade at all? The value of something is completely relative, speculative, and ever-changing.

[davidgh]

Profit or gain may be measured in USD, but a transaction does not need to include USD to generate a taxable gain.

The IRS has all sorts of rules involving barters, meaning trading one asset for another without USD being involved in the transaction at all. [1]

Say you buy a car for $10k, let it sit in your garage for 30 years and it now becomes a classic vintage worth $30k. If you go and trade that car for a new motorcycle worth $30k, the IRS requires you to record your $20k gain on the car when you make the trade for the motorcycle.

Where does it end? When you’ve paid the IRS the tax you owe, as per the law.

Regarding the pocket lint, if you tell me you’ll pay $10k for mine, I have no gain. When the sale happens, I recognize the $10k gain and pay the tax. This seems to be a pretty typical transaction for pocket lint or a truckload of butter.

1. https://www.irs.gov/taxtopics/tc420

[dmoy]

Or actually if it was literally pocket lint, y'all could probably get away with having the payer file form 709 and the seller doing nothing, and nobody would owe any tax.

[aggronn]

Lets say you make a 50% gain on btc. You have made money, but haven't realized the gain. You pay taxes when you realize a gain. You're argument is based on semantics, and not convincing.

At the end of the day, whether you traded BTC for DOGE or for IKEA couches, you were able to buy more of the second thing after you traded your BTC. You sold it. You realized your 50% gain.

Its farcicle to argue that by trading BTC for DOGE you're not realizing your gain. You're no longer tied to BTC, and your purchasing power increased at the time of the trade. Your wealth converted to USD went up. You sold your asset. You owe taxes.

> If I tell you I'll pay you 10000 dollars for the pocket lint in your pocket, did you just make a gain of 10k?

Yes. this is exactly how it works. you made a $10k profit. Its not a capital gain, but you made a profit and owe taxes. You dont owe them 10k, but you owe them part of it. If you then go and invest that 10k on physical capital in order to make more lint, then you can deduct that again as a business expense because you've essentially lost 10k on an investment (assuming 100% depreciation).

> The value of something is completely relative, speculative, and ever-changing.

This is why the thing that matters is when you realize your gain by selling the asset. It doesn't matter what you sold it for, you either realized a gain or a loss and that has tax implications.

[amorphid]

Say you're way, way up in your Bitcoin investment, and you yse part of the gains to buy a $10 toaster with the equivalent amount of Bitcoin (let's assume no tax in the toaster itself).

Do you realize a $10/gain, and owe money on that? If yes, let's say you return the toaster, and your Bitcoin is refunded. Do you still pay taxes?

[aggronn]

Yes. The point is that when you "trade" BTC for something, you're selling it. We differentiate between a sale and a trade colloquially based on whether currency is involved, but currency isn't that special--its just another good. You realize your gain when you sell your thing in exchange for some other thing.

Moreover, if you bought the toaster, and sold it for $20 in BTC, you would have profited $10 and would need to pay taxes on it.

[jabgrabdthrow]

Your comment reads like an insight from an authoritative and trustworthy source, but you have no idea what you’re talking about and your intuitions are totally wrong.

[dmoy]

If lint is something people are commonly buying, selling, speculating on, sure. Otherwise no.

[daveguy]

Not an accountant, but I think you should recognize gains with every trade just like Intel and Google trades that liquidate or forex trades.

Key point here is that you also recognize every loss. Which means in effect you are only paying tax on the amount your wealth increased over the tax period.

It could still be huge, but only proportional to huge overall gains.

Not sure about the trading fees for frequent traders. That's definitely a CPA question.

[nokcha]

>Not sure about the trading fees

I believe they factor into calculating the gain/loss. E.g., if you buy 100 units for $99 plus a $1 fee, then your cost basis is ($99 + $1)/(100 units) = $1.00/unit. If you later sell them all for $111 with a $1 fee, then your capital gain is ($111 - $1) - ($100) = $10.

[dnautics]

Think about it this way: you place a trade on December 28th or so that is valued at a few million, then make a series of disastrous trades that bring your account down to 10k in February.

You owe taxes to the feds and state of about 500,000, which you don't have anymore. That is of course carried forward as a loss for the next year, but that only results in reducing taxable income at a potentially lower bracket.

[dopamean]

I'm almost certain there was a guy on r/CryptoMarkets (or one of those crypto currency subs) who this happened to. He apparently traded a few bitcoin up to a few hundred in 2017. Then closed out his positions near the end of the year. Reinvested everything after the new year and lost almost all of it. If that's all true he could be on the hook for a lot of money.

[s73v3r_]

No different than if you had done it with stocks instead.

[notheguyouthink]

> If I buy $10k of Intel, it grows to $15k and I sell it to buy $15k of Google, I owe tax on the $5k gain.

For someone who knows nothing about tax law, if I draw the $15k back from Google to USD, would I pay taxes on the full 15k?

This gains growth tax thing seems to make sense, if there is no taxes when converting it to USD. Eg, if I take 10k and make an additional 10k converting from BTC->ETH and pay taxes on that new 10k, that's reasonable to me if I only pay taxes once on those gains. If however, I withdraw the 20k ETH to USD, and pay taxes on the 20k, then effectively I've paid double taxes on the gained $10k.

Is there a way to handle that in tax law? Or are trades among stocks/etc supposed to be double taxed like that?

[ISL]

Capital gains taxes are paid only upon the gains, not the principal.

[notheguyouthink]

Well that makes me feel better, at least

[maxerickson]

Traders in stocks get different tax treatment than investors:

https://www.irs.gov/taxtopics/tc429

Are cybercurrencies not considered securities in that same sense? Has anyone seen tax advice about how the day trader rules apply?

[wyldfire]

> one could argue that there is no “liquidity” event by trading one crypto for another. But perhaps the IRS argues there is a phantom liquidity event during such a trade.

This is called a "like-kind trade" which is IMO muddy for cryptocoins [1].

EDIT: oh yes, I see now that you cite 1031, oops.

[1] https://www.forbes.com/sites/tysoncross/2018/02/19/the-truth...

[pdshrader]

It's muddy for 2017 and prior years, but the new tax bill limits 1031 "like-kind" exchanges to real estate - so beginning Jan 1, 2018, it's a taxable event every time you sell a cryptocurrency, even if you're receiving another cryptocurrency in return.

The link you cited above covers this on page 4.

Keep in mind also that like-kind exchanges, if you're going to use them this year and for prior year reporting, require you to claim them explicitly on your taxes [1].

[1] https://www.forbes.com/sites/robertwood/2017/11/27/tax-bills...