Is exchanging one cryptocurrency for another taxable? (2024)

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• Cryptocurrency is taxed as property, similar to stock investments.
• In addition to exchanging crypto for government-issued currency, trading one crypto for another type of crypto creates a taxable event.
• Capital gains taxes apply to crypto, and calculating your liability can be tedious.

For cryptocurrency investors, it's critical to keep one thing in mind this tax season: You need to report all of your crypto activity to the IRS, including crypto-to-crypto exchanges.

While tens of millions of Americans actively hold, invest, or trade crypto, many of them likely forget or forgo reporting their activity to the IRS — something that they're legally required to do.

For some active traders, the volume of information is just too overwhelming. "It can be like herding cats," says Clinton Donnelly, president and founder of CryptoTaxAudit, a tax firm that works exclusively with crypto traders and defends people in IRS audits.

Read on to find out how crypto is taxed, why exchanging crypto triggers a tax liability, and how to calculate what you might owe to Uncle Sam.

How is crypto taxed?

Cryptocurrencies (including crypto-related assets, like non-fungible tokens, or NFTs) are viewed as property by the IRS and are taxed as such. In effect, you pay taxes on crypto much in the same way that you pay taxes on real estate or stocks.

"When you sell it, it becomes a taxable event," says Donnelly. "It doesn't matter what you buy or exchange it for, it's the fact that you are disposing of the asset. Some people think that if you dispose of it and get cash, then that's the only time it's taxable," he says. "It doesn't matter — it's the fact that you disposed of it that creates a taxable event."

A disposal is a taxable event because you've either made a profit, lost money, or broke even from the exchange. Accordingly, investors need to pay capital gains taxes on their profits from selling or exchanging crypto.

There are two types of capital gains taxes that may apply, depending on how long an investor held their asset: Short-term capital gains tax (the asset was held for less than one year), or long-term capital gains tax (the asset was held for more than one year). Short-term tax rates correspond to your ordinary income tax bracket — meaning that high-income taxpayers could owe as much as 37% — and long-term tax rates tend to top out at 20%.

Why exchanging crypto is a taxable event

While some investors may not think that trading their Ether for bitcoin is taxable, likely because the exchange doesn't involve actual US dollars, it does still create a profit or a loss — and the IRS wants to know about it.

In that sense, crypto is taxed the same way that stock sales are taxed, says Jeremy Johnson, a Texas-based certified public accountant.

In other words, when you initially come into possession of a crypto asset, it has a certain value, or cost basis. And when you part ways with it — either by selling it, exchanging it, or otherwise — it has a new, different value. The difference between the two values is what the IRS is interested in.

The same logic applies if you use crypto to purchase goods or services, or even earn cryptocurrency through a play-to-earn game.

It comes down to this: Every crypto transaction you make, whether you profit from the exchangeor not, needs to be reported to the IRS. If you've had a single Bitcoin for 10 years, and use it to buy a pizza, you'll need to report that transaction to the IRS. Likewise, if you trade BTC for its equivalent in another crypto, like ETH, that could produce a capital gain.

Example of a capital gain on crypto-to-crypto transactions

Let's say you bought a single BTC when it was priced at $10,000. With BTC prices at $20,000, you plan to exchange it for 10 ether (ETH), which are valued at $2,000. While the trade is equal in terms of value in US dollars — $20,000 in BTC is being exchanged for $20,000 in ETH — it's the cost basis you have to pay attention to.

In this case, you would owe capital gains tax on the $10,000 gain, because your BTC purchase would have appreciated $10,000 between when you originally purchased it and when you exchanged it. Remember, though, that the exact capital gains rate that would apply depends on how long you held the BTC.

Example of a capital loss on crypto-to-crypto transactions

Conversely, investors can realize a loss on their crypto holdings. Say you purchased BTC for $10,000, and its value fell to $5,000 and you traded it for 2.5 ETH (worth $5,000, from the previous example). Your BTC holding would have depreciated $5,000 from the time you purchased it to the time you exchanged it.

As such, you're realizing a capital loss of $5,000, which is a taxable event and must be reported on your tax return. However, you wouldn't owe money on the capital loss — in fact, you can use the capital loss to offset some of your capital gains on other assets. The important thing to remember is that you need to report it, whether it's a gain or loss.

How to calculate crypto taxes

Calculating crypto taxes can be daunting, especially if you're active in the markets. Each trade or transaction will need to be reported, along with corresponding cost bases and exchange values. From there, the capital gain or loss needs to be calculated and reported.

Each transaction will result in a capital gain or loss, and investors will ultimately only owe taxes on the net total — so, if your capital losses outweigh your capital gains, you won't owe anything at all. You can also use up to $3,000 of capital losses to offset tax liabilities on your ordinary income, and carry forward additional losses into the years ahead.

"The calculation isn't really difficult, it's basic math, but you need to know the date of acquisition, the amount, and the date of disposition and the amount of sale," says Johnson. "That's going to determine if it's long-term or short-term and if you have a gain or a loss."

If you have a lot of transactions, however, Johnson warns that it's easy to get in over your head. "You can do it yourself," he says, "but it's probably best to work with a professional to make sure everything is as it should be."