# 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.

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

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

• 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 '17 at 20:07
• Buying the same objects later is not precluded; but for all purposes, these 3 trades represent a full 'Round-trip'. – wdudz Feb 2 '17 at 20:11
• How much was A sold for during Day 1? – Nosrac Feb 2 '17 at 20:39
• @DanielCarson, 1 A was short-sold to gain 5 B. No dollars transacted. – wdudz Feb 3 '17 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.

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).