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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?

by Zarath 9y ago

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.
  - sdkmvx 9y ago
    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.
panarky 9y ago
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 https://en.wikipedia.org/wiki/Like-kind_exchange
- aorloff 9y ago
  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.

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?

by 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.
- sdkmvx 9y ago
  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.

panarky 9y ago

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 https://en.wikipedia.org/wiki/Like-kind_exchange

aorloff 9y ago
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.