# Capital Gains Puzzle

Assume there are two like-kind capital assets: A and B.

Neither A nor B have ever been traded for dollars or any other currency prior to Day 1, and hence have no established market value.

Assume the portfolio starts with:

• Position: 0A, 0B, and \$10.

Day 1, Trade 1:

• Short-sale of 1 A to get 5 B
• Net Position: -1A, 5B, \$10.

Day 2, Trade 2:

• Purchase 1 A for \$10
• Net Position: 0A, 5B, \$0

Day 3, Trade 3:

• Sale of 5 B for \$15
• Net Position: 0A, 0B, \$15

What would ultimately be reported for capital gains? (in the US Form 8949)

Hint: Situations like this occur in real-life, where A and B are cryptocurrencies (like bitcoin, but different flavors of cryptocurrency)

• Are you buying the same product later or is it a like object that is inherently different?
– Liam
Feb 2, 2017 at 20:07
• Buying the same objects later is not precluded; but for all purposes, these 3 trades represent a full 'Round-trip'. Feb 2, 2017 at 20:11
• How much was A sold for during Day 1? Feb 2, 2017 at 20:39
• @DanielCarson, 1 A was short-sold to gain 5 B. No dollars transacted. Feb 3, 2017 at 22:28

Your net capital gains is \$5.

At the start 1A = 5B.

So if at the start A = \$5 then B = \$1.

You would then buy A for \$10 and make a loss of \$5 on the short sale. Then you sell each B for \$3 (total of \$15) and make a \$10 profit. Total net gain is \$10 - \$5 = \$5.

If you start with A = \$10 then B = \$2.

You would then buy A for \$10 and make no profit or loss on the short sale. Then you sell each B for \$3 (total of \$15) and make a profit of \$5. Total net gain is again \$5 (\$0 + \$5).

If you start with A = \$15 then B = \$3.

You would then buy A for \$10 and make \$5 profit on the short sale. Then you sell B for \$3 (total of \$15) and make no profit or loss. Total net gain is \$5 (\$5 + \$0).

No matter what the initial values of A and B are your total net gain is always \$5.

• Great answer. I love the logic. The final part of the question involves how it would be reported though. How would you think proceeds and cost basis be reported? Feb 3, 2017 at 22:00
• You just work out the gains and losses on each trade and then add them together. In Australia we work out the cost basis by adding any brokerage and other fees to enter and to exit the trade to the purchase price. Feb 4, 2017 at 22:00

There are two different answers.
1. If you buying the same product, that you sold, later collapse the trade from the beginning and end. Ending with a capital gain of \$5.
2. These are different products, each buy and sell would be a separate transaction. This would end in \$10 capital gains as according to the IRS, capital loss for items of personal use are not recorded.

• I don't understand #2, as there is no personal use involved. Only trades of capital assets that are not consumed. Feb 2, 2017 at 20:25