Bitcoin and Crypto Talk (Merged)(includes NFT)
Money flowing out of bitcoin and into alts happens all the time. It's happening now. When bitcoin hits a lull or dip, money typically flows into the altcoins and they see a spike. That's what happened the past few days. Eventually, bitcoin will most likely go on another run, and we'll see the alts dip as money pours back into bitcoin.
The govt is obviously interested in getting their piece of the pie. They asked Coinbase to provide all of their customer records, but Coinbase took them to court and ended up only having to provide the top 3%. I think I read that was people who had cashed out 6 figures or more.
At any rate, if I have any profits left when I decide to call it quits, I'll report the gains just to cover my ***. Or at least I'll talk to a tax professional about it and take their advice.
I hear you.
To be truly compliant, I think you have to consider each transaction as a taxable event. For instance, if you bought $2,000 worth of BTC in May, and then, when the BTC was worth $8,000 in November, you used all of it to purchase LTC, that's a taxable capital gain (of $6,000). And because you held the asset for less than one year, its a short-term capital gain that is treated as ordinary income . . . and taxed at your overall ordinary rate, whatever that may be.
Even though you never converted the holding back to cash (instead to you went BTC to LTC), it's still likely to be seen by the IRS as the sale of a capital asset to purchase a new capital asset. This is not a "like-kind" trade wherein the basis in the original acquisition (BTC) is then transferred over to the new asset (LTC) but not considered a taxable event.
Apparently some in the crypto world want to believe that the IRS would treat coin-to-coin trades as "like-kind" but the rationale is very suspect - and probably doesn't hold up to meaningful analysis. Further, just because the IRS hasn't expressly stated it's not a like-kind trade doesn't give investors a pass to treat it that way until IRS clarifies. The IRS could simply say "No, there's no real support for you conclude it's a like-kind trade, so you shouldn't have presumed you could treat it that way" and apply penalties and interest for unreported gains.
It certainly appears that the prudent course is to treat any divestiture of cryptocurrency (even when used to buy other coin - or, in other words "convert" it to another kind) as a sale of a capital asset. As such, you have to figure out the cost basis (on a first-in, first-out method) and compute the capital gain . . . then apply capital gain treatment based on whether it is short or long term. In other words, if you have any transactions in any given year where you realized a gain on the transaction, you have to calculate the gain and report it in your return for that year. Even if you never returned the investment to USD and put it in the bank.
If you trade a lot, that's a pain in the ***. You would have to go through your trade ledger and compute it (or there are programs out there that will do it for you if you download your trade ledger as a CSV file.
Sources:
https://www.forbes.com/sites/greats...oves-for-cryptocurrency-traders/#62081f741c17
https://greentradertax.com/cryptocurrency-traders-risk-irs-trouble-with-like-kind-exchanges/