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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 bitcoi

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.

jschmitz28 9y ago
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.
- teawrecks 9y ago
  At the end of the day, you're going to pay your taxes in USD. So yeah, the USD value does matter.
- Spooky23 9y ago
  This is where the magic of crypto money starts falling down. Normal money is legal tender, commodities are not.
- newfoundglory 9y ago
  > the trade doesn’t involve USD at all Neither does buying pounds in euros, but you'll still calculate your taxes in USD.
gamblor956 9y ago
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.

jschmitz28 9y ago

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.

teawrecks 9y ago
At the end of the day, you're going to pay your taxes in USD. So yeah, the USD value does matter.
Spooky23 9y ago
This is where the magic of crypto money starts falling down. Normal money is legal tender, commodities are not.
newfoundglory 9y ago
> the trade doesn’t involve USD at all Neither does buying pounds in euros, but you'll still calculate your taxes in USD.

gamblor956 9y ago

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.