With crypto prices soaring, and onramps to trading more plentiful than ever, there are a lot of new people joining the crypto trading space. As a result of this, it's never been a better time to go back over the basics of crypto taxation! One of our full-service tax professional partners, Andrew Gordon, shares valuable tax information about crypto to crypto trading in today's guest blog post.
Many of our customers want to know if trading crypto for crypto — aka, exchanging or trading different types of virtual coins — is taxable. The answer is yes.
Example: You decide to use some of your Ethereum to purchase 1 Litecoin. From a tax perspective, it’s as if you sold the ETH for fiat, and then used fiat to purchase the Litecoin. Since the ETH was “sold,” you will have a capital gain or loss on the transaction, depending on your initial cost basis.
Why is it taxed this way?
The IRS has defined cryptocurrency as property, similar to stocks or real estate investments. Each type of cryptocurrency is considered a separate asset. So when you use cryptocurrency in a transaction—even trading one type of crypto for another type—it’s as if you sold your crypto for USD and then used USD to complete the transaction.
How to calculate the proceeds on a crypto-to-crypto trade
Most cryptocurrency transactions are reported on tax form 8949, Sales and Other Dispositions of Capital Assets. This form requires the following information for each transaction: Cost basis, date acquired, date sold, and sales proceeds.
Let’s go back to the example of converting a portion of Ethereum to 1 Litecoin. If you never actually cashed out, how do you know the sales proceeds for your “sale” of ETH? In this case, the fair market value of Litecoin in USD at the time of the transaction would be your sales proceeds. Bitcoin.Tax will automatically record the correct amount for your report.
What about like-kind exchange?
Although many crypto investors argue that simply exchanging one cryptocurrency for another should count as a like-kind exchange, the IRS has definitively stated that this is not the case.
Like-kind exchange is a tax-deferment method used most commonly in real estate. It allows the investor to exchange one asset for a similar one (i.e. selling one rental property and using the funds to purchase another rental property) without realizing a capital gain on the sale of the first asset.
The IRS has issued guidance stating that for tax year 2018 onward, like-kind exchange does not apply to cryptocurrency.
For tax years 2017 and earlier, you could try to argue to the IRS that like-kind exchange should apply to your crypto-to-crypto transactions. However, we’ve never seen this argued successfully. Cryptocurrency transactions typically don’t meet the requirements of a bona fide like-kind exchange, such as swapping the assets through a qualified intermediary.
Have more questions about your cryptocurrency tax return? Get personalized advice from a crypto tax attorney and CPA using our full-service tax preparation service.
Andrew Gordon is a cryptocurrency tax lawyer and Certified Public Accountant who has practiced cryptocurrency tax law since 2014. His firm, Gordon Law Group, has helped hundreds of virtual currency investors reconcile their crypto transaction data, file tax returns, amend previous returns, and fight crypto-related audits and tax bills.