The Tax Implications of Cryptocurrency Swaps and Conversions
A Clear-Cut Guide for Beginners Navigating Crypto-to-Crypto Trades
Introduction: Crypto Swaps Aren’t Tax-Free — Here’s Why It Matters
In the early days of crypto, many traders assumed that if they weren’t cashing out to fiat (like USD), they weren’t triggering taxes. Unfortunately, that’s a myth — and a costly one. The IRS sees things differently.
If you’ve ever traded Bitcoin for Ethereum, swapped stablecoins on a DeFi platform, or participated in a token migration (e.g., moving from LEND to AAVE), then guess what? You may have triggered a taxable event, even though no fiat ever touched your wallet.
This article explains how the IRS treats cryptocurrency swaps and conversions, when you might owe taxes, how to calculate your gains or losses, and strategies to minimize your liability.
Part 1: What Are Cryptocurrency Swaps and Conversions?
Before diving into tax rules, let’s make sure we’re speaking the same language.
1.1 Cryptocurrency Swap
A crypto swap refers to trading one digital asset for another. Common examples:
Trading Bitcoin (BTC) for Ethereum (ETH)
Swapping USDC for DAI on Uniswap
Exchanging ADA for DOT on a centralized exchange
These are often called crypto-to-crypto transactions.
1.2 Cryptocurrency Conversion
This term is sometimes used more broadly and can refer to:
A swap (BTC → ETH)
A token upgrade or migration (e.g., VEN → VET)
Moving wrapped tokens (e.g., ETH → wETH)
Regardless of terminology, most of these are taxable events because they involve disposing of one asset to acquire another.
Part 2: Why Crypto-to-Crypto Trades Are Taxable in the U.S.
Here’s the key rule from the IRS:
“The exchange of one cryptocurrency for another is a taxable event.”
This dates back to IRS Notice 2014-21, which established that crypto is property, not currency. Just like selling stock or real estate, disposing of one crypto to acquire another requires you to report gains or losses.
2.1 No More Like-Kind Treatment
Before 2018, some traders argued that swaps might qualify for Section 1031 like-kind exchanges, where certain property trades can defer taxes. But with the Tax Cuts and Jobs Act of 2017, like-kind exchange treatment is now limited strictly to real estate. Crypto no longer qualifies.
So when you trade BTC for ETH, it’s treated like selling BTC and then using the proceeds to buy ETH — even if it all happens in one click.
Part 3: How to Calculate Taxes on Crypto Swaps
Let’s walk through the math with a simple example.
3.1 Cost Basis and Proceeds
Say you:
Bought 1 BTC for $10,000 in March 2022
Traded that 1 BTC for 15 ETH in May 2023, when BTC was worth $25,000
Here’s what happens:
Item Value Cost Basis (BTC) $10,000 Fair Market Value at Sale (BTC → ETH) $25,000 Capital Gain $15,000 (taxable)
Even though you didn’t cash out to USD, you realized a gain. The IRS considers this a capital gain.
3.2 Holding Period Matters
Short-Term Capital Gains: Assets held for 1 year or less are taxed at ordinary income rates (10–37%).
Long-Term Capital Gains: Assets held for over 1 year get favorable rates (0%, 15%, or 20%, depending on income).
So in the example above, if you held BTC for over a year before swapping, you might pay a lower tax rate.
Part 4: Token Swaps, Forks, and Migrations
4.1 Token Upgrades (e.g., LEND → AAVE)
In many DeFi projects, tokens are upgraded or migrated. For example:
LEND holders were offered 1 AAVE for every 100 LEND tokens.
New tokens may appear in your wallet automatically via smart contract.
Tax Treatment: These are generally taxable if the new token has discernible market value at the time of the swap. Your cost basis in the new token becomes its market value at the time of acquisition.
4.2 Chain Forks (e.g., BTC → BCH)
When a blockchain forks and you receive new coins (like Bitcoin Cash after the Bitcoin fork in 2017), the IRS considers it income at the fair market value when you gain control over the new tokens. Later, when you sell or swap the forked coins, you’ll realize a gain or loss.
Part 5: DeFi Swaps and Wrapping
5.1 DeFi Swaps on DEXs
Every time you:
Use Uniswap to trade ETH for LINK
Swap stablecoins via Curve or 1inch
…you’re making a taxable trade. These smart contract interactions are no different from using Coinbase, even if it feels more “peer-to-peer.”
5.2 Wrapping and Unwrapping Tokens (e.g., ETH → wETH)
Here’s where it gets murky. Technically, wrapping ETH into wETH doesn’t involve disposing of your ETH — you’re locking it up in a smart contract in exchange for a 1:1 token.
**Most CPAs treat ETH ↔ wETH as a non-taxable event, especially if the value stays pegged. But this isn’t explicitly clear in IRS guidance, so proceed cautiously and document everything.
Part 6: Reporting Crypto Swaps on Your Taxes
6.1 Form 8949
All crypto trades, including swaps, must be reported on Form 8949, which breaks down:
Date acquired
Date sold (or swapped)
Proceeds
Cost basis
Gain/loss
Each trade — even if it’s just ETH for UNI — is a line item.
6.2 Schedule D
After listing your transactions on Form 8949, the totals roll up to Schedule D, where capital gains and losses are summarized and factored into your final tax liability.
Part 7: Tools That Can Help
Tracking every crypto swap manually is a nightmare. Fortunately, there are several tools to automate this:
CoinLedger (formerly CryptoTrader.Tax)
These tools connect to your wallets and exchanges, calculate gains/losses, and even generate Form 8949.
Part 8: Strategies to Reduce Tax Impact
8.1 Hold for Over a Year
Long-term gains are taxed at lower rates. If you’re not an active trader, consider holding before swapping.
8.2 Tax-Loss Harvesting
Did you swap into a token that lost value? Sell it at a loss before year-end to offset other gains. You can deduct up to $3,000 of net capital losses against ordinary income annually.
8.3 Track Cost Basis Accurately
Make sure you use the correct accounting method:
FIFO (First-In, First-Out) – default method
Specific Identification – choose which lots to sell to optimize tax outcomes (requires solid documentation)
8.4 Consider Using IRAs or Trusts
Some investors use crypto IRAs or LLCs/trusts to defer taxes or structure gains more efficiently. These methods require expert guidance but can shield gains from immediate taxation.
Part 9: Common Mistakes to Avoid
Assuming swaps aren’t taxable: They are.
Not tracking basis properly: It leads to inflated gains.
Ignoring DeFi activity: Every interaction is a trade.
Missing airdrops or token swaps: These could be income.
Final Thoughts: Knowledge Is Tax Power
As the crypto world continues to evolve, so do the rules around taxation. What remains consistent is the IRS’s stance: if you’re swapping one crypto for another, it’s taxable.
Understanding this early will save you from surprises later. Whether you’re a casual DeFi user or a serious trader, keeping accurate records, using the right tools, and staying informed is the best way to stay on the right side of tax law — and protect your gains.
If you’re unsure how a specific swap should be treated, consult a tax professional who specializes in cryptocurrency. The cost of bad advice (or no advice) can be far higher than the fee for expert guidance.
DISCLAIMER: The views and opinions expressed are those of the authors and do not necessarily reflect the official policy or position of CoinFlask. Do your own research. This is not financial advice