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Is the cost basis calculated by the US dollar value of each at the time of the exchange? Or based on the exchange rate of the two currencies? Scenario: 1. I b

Is the cost basis calculated by the US dollar value of each at the time of the exchange? Or based on the exchange rate of the two currencies? Scenario: 1. I buy 1 ETH for 1 USD when rates are 1 ETH/USD, 2 ETH/BTC. 2. I trade 1 ETH for 1 BTC when rates are 2 ETH/USD, 1 ETH/BTC. Option 1: I’ve incurred a loss, because the sale is reported as first a sale of ETH for USD, then a purchase of BTC at whatever the cost basis between BTC/USD. Option 2: I’ve incurred a gain, because I traded directly from ETH to BTC, and the relative value between ETH and BTC has gone up.

chollida1 9y ago
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.
jclardy 9y ago
Yeah, this is the confusing part for me - moving from BTC to other crypto. Also if it is based on USD price at the time of the transaction...then which one? Coinbase rates can be far different from other exchanges.
- an_account 9y ago
  The lowest/highest one you can convince the IRS is valid.
- s73ver_ 9y ago
  The safest and simplest is probably the rate of the exchange you're using.
  - dnautics 9y ago
    Some exchanges don't have usd. Even for those that do, it takes about 30-90 minutes to typically move ~100k in assets from one currency to another, double that if you're going between two altcoins via Bitcoin. During that time the effective usd exchange can have nontrivial swings.
    - s73ver_ 9y ago
      You go with the price when the transaction actually goes through.
      - dnautics 9y ago
        Which transaction? Moving money like that is not a single tx
jermaustin1 9y ago
It is the exact same as exchanging mutual funds at your brokerage. Like an exchange I did just this morning: $10,000 VHDYX -> $10,000 VFIAX. It creates two orders a sell and a buy. I'm taxed capital gains on the $10k sale (about $600 gain) and the buy has nothing to do with it, until I sell it in 5 years.
- nonbel 9y ago
  There is no sale for dollars involved in the OP's scenario. Is there an actual sell in your scenario or is it "virtual"?
  - jermaustin1 9y ago
    There is no "real" sell on Vanguard to go from one fund to another, but regulations require them to mark it as a sale, and to denote the cost basis of the sale.
    - nonbel 9y ago
      Interesting, thanks.
    - notyourday 9y ago
      It also will be marked-to-market
      - jermaustin1 9y ago
        Interesting, I have never heard that term. I'm pretty uneducated in finance. I just have done great on my Vanguard Mutual Funds, and I keep them going.
  - saalweachter 9y ago
    To use the programming lingo that I hope a majority of HN users still recognize, they're like a sequence point.
  - sowbug 9y ago
deleted 9y ago
[deleted]

chollida1 9y ago

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.

jclardy 9y ago

Yeah, this is the confusing part for me - moving from BTC to other crypto. Also if it is based on USD price at the time of the transaction...then which one? Coinbase rates can be far different from other exchanges.

an_account 9y ago
The lowest/highest one you can convince the IRS is valid.
s73ver_ 9y ago
The safest and simplest is probably the rate of the exchange you're using.
- dnautics 9y ago
  Some exchanges don't have usd. Even for those that do, it takes about 30-90 minutes to typically move ~100k in assets from one currency to another, double that if you're going between two altcoins via Bitcoin. During that time the effective usd exchange can have nontrivial swings.
  - s73ver_ 9y ago
    You go with the price when the transaction actually goes through.
    - dnautics 9y ago
      Which transaction? Moving money like that is not a single tx

jermaustin1 9y ago

It is the exact same as exchanging mutual funds at your brokerage. Like an exchange I did just this morning: $10,000 VHDYX -> $10,000 VFIAX. It creates two orders a sell and a buy. I'm taxed capital gains on the $10k sale (about $600 gain) and the buy has nothing to do with it, until I sell it in 5 years.

nonbel 9y ago
There is no sale for dollars involved in the OP's scenario. Is there an actual sell in your scenario or is it "virtual"?
- jermaustin1 9y ago
  There is no "real" sell on Vanguard to go from one fund to another, but regulations require them to mark it as a sale, and to denote the cost basis of the sale.
  - nonbel 9y ago
    Interesting, thanks.
  - notyourday 9y ago
    It also will be marked-to-market
    - jermaustin1 9y ago
      Interesting, I have never heard that term. I'm pretty uneducated in finance. I just have done great on my Vanguard Mutual Funds, and I keep them going.
- saalweachter 9y ago
  To use the programming lingo that I hope a majority of HN users still recognize, they're like a sequence point.
- sowbug 9y ago

deleted 9y ago

[deleted]