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Crypto Law/Level II · Tax: the first trap/2.1 Taxable events/Lesson 3

Swapping one coin for another

Why trading one token for another is a taxable disposal in the US even though no dollars change hands, and why the old like-kind argument does not work.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest swap is the one not made: each crypto-for-crypto trade is a disposal under the IRS FAQs, and no like-kind deferral exists because section 1031 has covered only real property since 2018.
  2. Swap out of lots held more than one year, or specifically identified high-basis lots, so any gain is small or long-term (2026 0% band to $49,450 single); identify units by the time of the trade.
  3. Swapping a coin worth less than its cost realises a capital loss that offsets gains and up to $3,000 of other income a year, with the rest carried forward; record the dollar value at the swap.
  4. Value each swap free with the exchange-recorded dollar amount or a blockchain-explorer price, as the IRS FAQs allow, applied consistently; wraps and bridges have no published answer, so record the position you take.

MaterialsThe IRS virtual currency FAQs on exchanging one virtual currency for anotherIRS Chief Counsel Memorandum 202124008 on section 1031 and cryptoA swap history from an exchange or a decentralised-exchange wallet, with dates and dollar values

Wonder

  1. If I never cashed out to dollars, how can I owe tax?
  2. What is my cost in the new coin after a swap?
  3. Did swaps ever qualify for the like-kind exchange rule?

Explore

  1. A swap is trading one crypto asset directly for another, for example ether for a stablecoin or one token for a different token, on an exchange or through a decentralised exchange’s smart contract. In the United States the IRS virtual currency FAQs answer plainly: if you exchange virtual currency held as a capital asset for other property, including another virtual currency, you recognize a capital gain or loss. The Form 1040 instructions list ‘disposed of a digital asset in exchange or trade for another digital asset’ among the actions that require a ‘Yes’ to the digital-asset question.
  2. The gain is measured in dollars even though none were involved. You compare the fair market value of what you received with your basis in what you gave up. Example: you bought one coin for $1,000 and swap it, when it is worth $3,000, for another token worth $3,000. You have a $2,000 gain. Your basis in the new token is its fair market value at the time of the exchange, $3,000, and its holding period starts again. For disposals on or after January 1, 2025, Treasury regulation §1.1001-7 reduces the amount realized by the fees paid to make the swap.
  3. Where does the dollar value come from? The IRS FAQs say that if an exchange facilitated the transaction, the value is the dollar amount the exchange recorded. For peer-to-peer or other trades, the IRS will accept the value given by a cryptocurrency or blockchain explorer that analyses worldwide indices. Notice 2014-21 asks for a reasonable method applied consistently. For a busy trader on a decentralised exchange, that means dozens or thousands of separate gain or loss figures, each needing a timestamp and a price.
  4. The swap trap is a tax bill with no cash to pay it. Suppose a gain is realized in a swap in March, and the new token then loses most of its value by December. The March gain is still taxable for that year. A later loss can offset it only if that loss is realized, for example by selling the new token, and net capital losses beyond capital gains are limited to $3,000 a year against other income (lesson 2.1.2). Swapping into a stablecoin is still a swap; it realizes the gain or loss on the coin given up.
  5. For years some holders argued that crypto-to-crypto trades were ‘like-kind exchanges’ under section 1031, which defers tax on swaps of similar property. Since January 1, 2018, the Tax Cuts and Jobs Act has limited section 1031 to real property, so the argument has no footing for later trades. For earlier ones, IRS Chief Counsel Memorandum 202124008, released in June 2021, concluded that exchanges of bitcoin for ether, bitcoin for litecoin and ether for litecoin did not qualify. Such memoranda cannot be cited as precedent under section 6110(k)(3), but they show how the IRS reads the law.
  6. Some token conversions sit in a grey zone, such as wrapping a coin into a token that tracks it or moving it across a bridge to another blockchain. The IRS FAQs do not address these directly, so treatment depends on the facts and on how a court or the IRS would view them; record them carefully either way. Elsewhere the answer can differ in detail but rarely in principle: UK guidance lists exchanging one type of cryptoasset for another as a disposal. A practical check: export one month of swaps and see whether each line shows a dollar value.

Key facts

  • The IRS FAQs state that exchanging virtual currency held as a capital asset for another virtual currency produces a capital gain or loss.
  • Basis in virtual currency received in a crypto-for-crypto exchange is its fair market value at the time of the exchange.
  • For trades facilitated by an exchange, the IRS FAQs use the dollar value recorded by the exchange as the fair market value.
  • Since 2018, section 1031 like-kind exchange treatment has been limited to real property.
  • IRS Chief Counsel Memorandum 202124008 concluded that pre-2018 exchanges of bitcoin for ether, bitcoin for litecoin and ether for litecoin did not qualify under section 1031.
  • Under section 6110(k)(3), written determinations such as Chief Counsel advice may not be used or cited as precedent unless regulations provide otherwise.

Exercise nine, six, three, one

9CollectList up to 9 swaps you made, or that appear in a sample wallet history, noting the token given up, the token received and the date.
6ClusterSort them into 6 categories: swaps into stablecoins, swaps between other tokens, swaps at a gain, swaps at a loss, wraps or bridges, and swaps with no dollar value recorded.
3DistillReduce the 6 categories to 3 groups: swaps you can value and report now, swaps that need a price source, and conversions whose treatment you would need to check.
1CrystallizeWrite 1 sentence explaining, in your own words, why a swap can create a tax bill even though no dollars were received.

Fact check

Dates, figures and claims checked against the published sources listed below.

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