If I Sold Bitcoin To Buy Ethereum, Would It Be A Taxable Event?

If you happen to be wondering whether selling Bitcoin to buy Ethereum is a taxable event, the answer is yes.

This answer often comes as a surprise. But back in 2014, the IRS issued guidance on how to account for cryptocurrencies. For tax reporting purposes, cryptocurrencies are treated as if they are property. That means we follow the rules that apply to property transactions for figuring out how to handle cryptocurrency transactions.

Cryptocurrency transactions are handled just the same way as buying and selling stocks, bonds, real estate and other types of property. When investors purchase cryptocurrency, they establish their cost basis in the coin. Later, when the investor sells or trades the coin, they will recognize capital gain income.

The main thing to understand is that exchanging one cryptocurrency for another cryptocurrency consists of two parts: Disposing of the first cryptocurrency and acquiring the second cryptocurrency. For example, imagine that an investor bought one Bitcoin at $400 and then later traded that one Bitcoin for one Ethereum when the value of both coins was at $1,000. This transaction is recorded as a $600 capital gain on the Bitcoin. The person would have a $1,000 cost basis in the Ethereum coin.

As another example, consider what happens if an investor sells Apple stock and buys shares of Google. That person would report the sale of the Apple stock as a taxable event. For tax purposes, it does not matter that the sale proceeds were reinvested into a new investment. The same thought process holds true when exchanging one type of cryptocurrency for another.

For tax purposes, what we are looking at reporting the sale or disposition of cryptocurrencies. Selling Bitcoin for cash is just one type of disposition. The term disposition here refers to transferring ownership of the property to another person.

The takeaway is that an investor who exchanges Bitcoin for Ethereum is giving up ownership over the Bitcoin and receiving Ethereum in exchange. This counts as a disposition and is reported as a capital gain on the investor’s tax return.

William Perez is a senior tax accountant at Visor, an online tax filing and advisory service.