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12-18-2017, 04:26 PM
 Junior Member Join Date: Feb 2017 Posts: 3
Cryptocurrency Cost Basis

My question has to do with calculating cost basis on cryptocurrencies.

Real life example:

1) Bought 5.75 Ethereum (ETH) valued at \$4086.60 @ \$710.71 USD per coin.

2) Few days later transferred Ethereum to another exchange and bought 5,795.3610 XRP for 5.9344 ETH. Price 0.001024 ETH per XRP. (I did not exchange for USD.)

So what would my cost basis be? Would it be the original \$4086.60 when I purchase Ethereum the few days before? Do I need to figure out the average price Ethereum was on the day I exchange ETH for XRP and use that as a selling price for ETH?

12-18-2017, 11:01 PM
 Moderator Join Date: Oct 2010 Posts: 5,226
So what would my cost basis be? Would it be the original \$4086.60 when I purchase Ethereum the few days before?=========> As long as the IRS treats bitcoin as property, then whenever you use bitcoin to buy anything you are supposed to consider the capital gain or capital loss; you, as a taxpayer,may feel a cryptocurrency split such as Bitcoin Cash qualifies as a tax-free exchange. The IRS taxes bitcoin like property, so until it's converted to fiat, it is not taxed. Your basis in Bitcoin will be the number of bitcoin received times the exchange rate on the date you received them. The IRS will know the date you received the Bitcoin and can pretty easily look up the exchange rate on that date.
It is also important to note that if you receive the Bitcoin as compensation for services, you should have reported the basis as ordinary revenue when received.

Do I need to figure out the average price Ethereum was on the day I exchange ETH for XRP and use that as a selling price for ETH====>>as mentioned above

01-02-2018, 11:13 AM
 Junior Member Join Date: Feb 2017 Posts: 3
Quote:
 Originally Posted by Wnhough So what would my cost basis be? Would it be the original \$4086.60 when I purchase Ethereum the few days before?=========> As long as the IRS treats bitcoin as property, then whenever you use bitcoin to buy anything you are supposed to consider the capital gain or capital loss; you, as a taxpayer,may feel a cryptocurrency split such as Bitcoin Cash qualifies as a tax-free exchange. The IRS taxes bitcoin like property, so until it's converted to fiat, it is not taxed. Your basis in Bitcoin will be the number of bitcoin received times the exchange rate on the date you received them. The IRS will know the date you received the Bitcoin and can pretty easily look up the exchange rate on that date. It is also important to note that if you receive the Bitcoin as compensation for services, you should have reported the basis as ordinary revenue when received. Do I need to figure out the average price Ethereum was on the day I exchange ETH for XRP and use that as a selling price for ETH====>>as mentioned above
My question is not about Bitcoin, but I guess in principle, the IRS rules relate to all cryptocurrency. No goods were purchased with any of my cryptocurrency. The original purchase of Ethereum was strictly for investment purposes, not for buying goods.

I been reading a lot online about like-kind exchanges, and I do not think that exchanging Ethereum for Ripple would qualify for tax deferral.

I think a realistic and good faith approach would be:

1) Establish the USD value at the time of purchasing Ethereum. (This is easy because the purchase was made in USD). (\$4086.60 USD)

2) Upon transferring Ethereum to another exchange to buy Ripple, establish the USD value at the time of transfer. (ex: \$4127.99 USD according to Etherscan) This will establish my total gain for Ethereum at about \$40 USD.

3) In the new online exchange, get rate of conversion for Ethereum/Ripple as indicated in the exchange rate .8389 XRP/ETH at the time of purchasing Ripple.

4) I received 5,795.3610 Ripple. So my new cost basis for XRP would be \$.71. (\$5795.3610 / \$4127.99 = \$0.71)

Is this reasonable to establish cost basis in the new currency?

01-03-2018, 08:15 AM
 Moderator Join Date: Oct 2010 Posts: 5,226
My question is not about Bitcoin, but I guess in principle, the IRS rules relate to all cryptocurrency. No goods were purchased with any of my cryptocurrency. The original purchase of Ethereum was strictly for investment purposes, not for buying goods. ===========>>The IRS states that cryptocurrencies are bitcoin and ethereum;

I been reading a lot online about like-kind exchanges, and I do not think that exchanging Ethereum for Ripple would qualify for tax deferral.=======>Agreed;I guess only God knows; at this time The House and the US Senate both currently push tax bills calling for the restriction of 1031 swaps to only apply to real estate, and not other forms of property. once the changes pass and eventually become part of the tax code, then 1031 and cryptocurrency will not likely be mentioned in the same sentence again.

I think a realistic and good faith approach would be:

1) Establish the USD value at the time of purchasing Ethereum. (This is easy because the purchase was made in USD). (\$4086.60 USD)

2) Upon transferring Ethereum to another exchange to buy Ripple, establish the USD value at the time of transfer. (ex: \$4127.99 USD according to Etherscan) This will establish my total gain for Ethereum at about \$40 USD.

3) In the new online exchange, get rate of conversion for Ethereum/Ripple as indicated in the exchange rate .8389 XRP/ETH at the time of purchasing Ripple.

4) I received 5,795.3610 Ripple. So my new cost basis for XRP would be \$.71. (\$5795.3610 / \$4127.99 = \$0.71)

Is this reasonable to establish cost basis in the new currency?=========>>frankly not sure of it;however in my opinion, the IRS doesn?t care about your cost basis b]method too much. in general,since there is no specific way to ensure consistent reporting, and many taxpayers may report conflicting cost basis maximizing personal tax advantages. Often it may not be possible to accurately determine a fair cost basis especially for newly created currencies.howeverr,in early IRS rulings, they provided guidance separating traded ?convertible? virtual currencies from other virtual currencies, noting that only convertible virtual currencies that have an ?equivalent value in real currency, or that acts as a substitute for real currency? will be considered taxable.
There are generally two tests to determine a virtual currency?s convertibility. First taxpayers should determine whether a currency is ?listed on an exchange and the exchange rate is established by market supply and demand,? which would make it convertible to another ?real currency? like the U.S. dollar.but this way still presents a gray area for virtual currencies that are thinly traded on exchanges and only trade with respect to other convertible virtual currencies. So you need to be aware the IRS has made it clear it plans to tax gains on successful convertible virtual currencies retroactively.The second test is to determine whether taxpayers can buy anything tangible with the currency, or if its value is instead driven by speculation. The IRS outlined, ?The sale / exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods / services in a real-world economy transaction, has tax consequences that may result in a tax liability.? If a currency isn?t valuable in commerce there is a true question as to whether this will be treated by the IRS as convertible.
Traders are permitted to calculate their cost bases using different methodologies. Since currencies are considered private property from a tax perspective, so as said previously, in reality,investors have the option to sell their assets on a FIFO basis/ a LIFO basis, or to sell those specific tax lots that are most efficient under the ?specific share identification? method used for stocks. Also as said, the choice of cost basis directly impacts long-term and short-term capital gains tax liabilities.Trading platforms may automatically incorporate FIFO or LIFO tracking methods but neither of these options may present the most tax efficient method for a taxpayer. Generally specific share identification offers the greatest tax planning opportunities and benefits.
This is most likely the tax advantaged approach to tracking a taxpayers cost basis but it currently costly to do and often times not possible.

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