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You only have to pay capital gains tax when you sell, so if everyone else is “hodling”... (unlikely).

nugget 9y ago
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.
- solotronics 9y ago
  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?
  - deleted 9y ago
    [deleted]
  - dragonwriter 9y ago
    > 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.
- Zarath 9y ago
  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?
  - Tyrek 9y ago
    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.
  - nugget 9y ago
    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.
    - panarky 9y ago
      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-code-section-1031 https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-c...
    - ThrustVectoring 9y ago
      There's also in-kind redemptions for exchange traded funds.
    - ahallock 9y ago
      > 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.
- nextstep 9y ago
  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.
  - vkou 9y ago
    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.
    - nextstep 9y ago
      Can you trade GOOG -> AAPL without first converting to USD (i.e. selling the GOOG stock and then buying AAPL stock)?
- ringaroundthetx 9y ago
  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.
sremani 9y ago
what if you dont sell, what if you move it to one of your own accounts or pay some else in "coin". This is a bit complicated than "capital gains".

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.

solotronics 9y ago
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?
- deleted 9y ago
  [deleted]
- dragonwriter 9y ago
  > 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.
Zarath 9y ago
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?
- Tyrek 9y ago
  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.
- nugget 9y ago
  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.
  - panarky 9y ago
    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-code-section-1031 https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-c...
  - ThrustVectoring 9y ago
    There's also in-kind redemptions for exchange traded funds.
  - ahallock 9y ago
    > 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.
nextstep 9y ago
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.
- vkou 9y ago
  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.
  - nextstep 9y ago
    Can you trade GOOG -> AAPL without first converting to USD (i.e. selling the GOOG stock and then buying AAPL stock)?
ringaroundthetx 9y ago
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.

sremani 9y ago

what if you dont sell, what if you move it to one of your own accounts or pay some else in "coin". This is a bit complicated than "capital gains".