Most crypto investors know that when you sell crypto for fiat, you’ll pay tax. But what about when you’re trading Bitcoin for Ether, or any other crypto for crypto?
Whether you’re trading Bitcoin for Ether, Ether for Cardano or any other crypto to crypto trades, you need to know your tax liability.
Tax authorities worldwide from the IRS to HMRC are sending a clear message - investors need to declare their income and profits from crypto investing. They’re even working with large crypto exchanges to share customer data to ensure tax compliance.
Many investors are still unsure of which crypto transactions are tax free, which are subject to tax, and even what kind of tax applies.
So when it comes to crypto to crypto taxes - what tax do you pay, if any?
In general, yes. Regardless of the crypto you’re trading, most tax offices view trading crypto for another crypto as a taxable event.
This is because most countries don’t view crypto as a currency. They view it as an asset - like a share or rental property. From a tax perspective, any time you ‘dispose’ of an asset, you’ll need to pay taxes.
It’s easy to think disposing of an asset only refers to selling it, but it doesn’t. Anytime you sell, swap, spend or gift crypto, most tax authorities will view this as an asset disposal and therefore a taxable transaction.
So when you trade crypto for crypto, from the tax office’s perspective, you’re getting rid of one asset and making a profit or a loss. This will be subject to Capital Gains Tax tax.
All this said, there’s a reason we’ve said most tax offices. There are a select few exceptions to this rule. For example, France only taxes crypto when it is exchanged for fiat currency, so exchanging one crypto for another would not be subject to tax. You should always check your country’s crypto tax rules specifically.
All crypto transactions viewed as a disposal, including swapping crypto, are subject to Capital Gains Tax.
You won’t pay tax on the value of the whole asset you swapped, only any gain you made as a result of trading it. You won’t pay tax on a loss, but you should keep track of losses as you may be able to offset these against your gains and reduce your tax bill.
You can calculate how much of a profit (or loss) you’ve made by figuring out your cost basis. Your cost basis is what it cost you to acquire your asset plus any fees.
Once you know your cost basis, all you need to do is subtract your cost basis from the fair market value of the asset you exchanged it for. We’ll use an example.
You buy 0.5 BTC for $28,000. There was a 0.1% buy fee, so $28. So your cost basis for this asset is currently $28,028.
You later decide to trade your 0.5 BTC for ETH. The fair market value (FMV) of 0.5 BTC that day is $30,000. The FMV of ETH that day is $5,000, so you now have 6 ETH.
You also had to pay an exchange fee of 0.1%, so $30. You can add this to your cost basis, giving you a total cost basis of $28,058. Now you need to figure out whether you made a capital gain or loss when you exchanged your BTC, so subtract it from the FMV of 0.5 BTC that day.
$30,000 - $28,058 = $1,942. You made a capital gain of $1,942, which you’ll pay Capital Gains Tax on. The amount you pay will depend on where you live and how much you earn.
It’s important to note, the tax office isn’t interested in how much ETH you bought. They’re only interested in whether you made a gain from your original investment at the point you disposed of it. You’re not paying tax on buying ETH, but disposing of BTC. Should you decide to sell, swap, spend or gift your 6 ETH in the future - your new cost basis would be $30,000.
You’ll need to report any capital gains and losses to your tax authority. Every tax authority does this a little differently, but for most you’ll report your capital gains and losses with your annual tax return. This may be as part of your regular Income Tax report or in an additional Capital Gains Tax form.
You can find specific guidance on how to file and pay your crypto taxes in our crypto tax guides:
Calculating your crypto taxes can be a real headache, but not with Koinly. All you need to do is sync your crypto wallets with Koinly via API or through CSV file import. Once your crypto transaction data is in Koinly, it will calculate your crypto taxes including your capital gains and losses, income and expenses.
All this information is then available on your tax reports page in a simple summary. Below this, you can export specific tax reports, ready to submit to your tax authority.