Quote:
Originally Posted by parkplace33
Lots of good conversation on this topic.
Question on crypto. I buy crypto at $5000. It is now worth $21000. If I pay for a card from an auction house today for that price, who pays for the $16000 gain? Me? Auction house?
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You do!
Crypto-currencies under current U.S. tax law are considered the same as like investments in stocks or bonds, that can constantly go up and down in value. Whatever you originally bought (or acquired) it at is your tax basis. And you only recognize profit for tax purposes (or loss if it goes down) when you have a reportable tax event occur in regards to that crypto-currency. In other words, when you sell/convert it into actual currency, like U.S. dollars, OR, as in your example, trade it to acquire a baseball card worth $21,000. That is correct, by giving up your crypto-currency for a baseball card, you technically did not buy the card, you traded for it in a barter transaction! Let that sink in for a second or two.
How many times on this forum have I said to everyone that doesn't realize it that trading cards, instead of paying cash/check for and buying them, is still technically a taxable barter transaction in the eyes of the IRS and under the laws of the Internal Revenue Code?
So if you "trade" your crypto-currency for a baseball card with a deemed FMV of $21,000, that is deemed to be what you received for your crypto-currency, and what you then use to properly determine the gain (or loss) on its disposition. (Which in your example you properly calculated at $16,000.) The tax basis of the crypto-currency in the hands of the person you traded it to for the baseball card is going to be that same $21,000, which was likely the market price of that particular crypto-currency at the time of you trade. And your tax basis in the baseball card will be the same $21,000 agreed upon for your barter deal.
And by the way, how long you may have owned the crypto-currency you used to trade for the baseball card matters as well. If you had owned the crypto-currency for one year or more, that $16,000 gain is recognized as a long term capital gain, subject to a maximum federal gains tax rate of 20.0%. If you owned the crypto-currency for less than a year, then the gain is short term capital gain, subject to tax at ordinary federal income tax rates, up to a current 37.0% max.
Trust this helps and fully answers your question.