🔄Exchanging one crypto for a different crypto
When exchanging one cryptocurrency for a different cryptocurrency, this creates a capital gain or loss. This is dependent on the fair market value of the cryptocurrency when it was bought and exchanged. When you dispose of one cryptocurrency for another, it is treated the same as if you sold the first for cash and then used the cash to buy the second. Therefore, you must take note of the cost basis of the currency you exchanged and the fair market value at the time of exchange. This is because the difference will generate a capital gain or loss.
Tax Treatment for Crypto to Crypto Trades
When you exchange one cryptocurrency for another, the IRS classifies the exchanges as a disposition and a capital event, you will need to calculate and report a capital gain or loss and are subject to capital gains tax.
For an exchange of cryptocurrency, capital gain or loss is the difference between the fair market value of the cryptocurrency you received and the original cost basis of the cryptocurrency you exchanged.
Like-kind exchanges allow for exchange of property of like-kind or similar nature without tax being applied (26 U.S.C. § 1031). Many traders wrongly assume that crypto to crypto transactions (such as exchanging some Bitcoin for Ethereum) meet this description. However, Congress has limited Like Kind Exchanges to only real property (real estate) since 2018 and the IRS has clarified that like-kind exchanges are not applicable to cryptocurrency.
Selling cryptocurrency for stablecoins is subject to capital gains tax. Stablecoins are cryptocurrencies that attempt to peg their market value to fiat currencies or other commodity prices. They can be backed by fiat currency or can achieve the desired value through other methods, but they are not a fiat currency. Therefore, the same cryptocurrency rules apply to stablecoins. Because you must exchange your original cryptocurrency for the stablecoin, the IRS considers it a disposition of a capital asset, and it may subject you to a capital gains tax.
Example
To further illustrate the capital gains tax consequences for exchanging cryptocurrencies, consider the following example:
Melanie buys 10 Token A for 20,000 USD in 2016.
In 2018 she trades her Token A (now worth 30,000 USD) for 10 Token B.
A few months later Token B’s value drops to 10,000 USD but Mel decides to hodl.
To determine her capital gains, we must classify the trade of Token A for Token B as a sale and subsequent buy:
| Transaction | Date (M-D-Y) | Amount | Price (USD) | Cost Basis (USD) |
|---|---|---|---|---|
Buy | 01-01-2016 | 10 Token A | $20,000 | $20,000 |
Sell | 01-07-2018 | 10 Token A | $30,000 | $20,000 |
Buy | 01-07-2018 | 10 Token B | $30,000 | $30,000 |
*Note that when Mel sold Token A on 01/07/2018, she gained $10,000 from her original purchase in 2016. That $10,000 is Mel's capital gain, and is now subject to a Capital Gains tax. This is true even though she now has an unrealized loss while holding Token B.
Let’s consider this same example, but in this case- Mel had sold her Token B at a loss:
| Transaction | Date (M-D-Y) | Amount | Price (USD) | Cost Basis (USD) |
|---|---|---|---|---|
Buy | 01-07-2018 | 10 Token B | $30,000 | $30,000 |
Sell | 04-03-2018 | 10 Token B | $10,000 | $30,000 |
As you can see in this example, when Mel waited until the price of Token B went down in April 2018, she sold it at a loss of $20,000 from when she originally bought in January. That $20,000 loss can be used to reduce her overall capital gains liability for 2018. When adding in the $10,000 gain from Token A to the $20,000 loss from Token B, she would still have a capital loss of $10,000 for the year.
Tax-Loss Harvesting
Selling crypto that is in a loss position to offset gains is an example of “tax-loss harvesting”, and some cryptocurrency investors will use this strategy to reduce their tax liability. We recommend consulting with your tax attorney or accountant to see if this strategy will assist you in your trading situation.
Crypto to Crypto Trades in Recap
Recap has been designed to work out the capital gains impact of every crypto-to-crypto trade.
Simply connect your exchange accounts or wallets through our automated integrations or enter your data manually via the user interface or CSV file.
Recap automatically generates a disposal for the asset being sold and an acquisition for the asset being bought. All USD valuations of the assets are determined by Recap's own market valuation engine using both foreign and cryptocurrency exchange rates.
See the tax impact of every trade (example below) in the tax tab or download a PDF tax report
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