That's insane to owe tax on unrealized profit.
it's not really
unrealized profit though.
But that is semantics and depends on your definition of what is realized. Imagine you buy a house for $50000 and it is later valued by an appraiser at $70000. Is that a realized gain? Probably you would say no.
indeed, the gain is unrealized because you haven't disposed of the property.
Let's say you trade that house for another house that is selling for $70000. Now is it realized? All you have is a house, you don't have an extra $20000 in cash. But if it is realized, then you have to come up with the cash from somewhere to pay your taxes. The only difference with crypto is that it is liquid and easier to sell part of it.
real property qualifies for like-kind exchanges under the USA tax code, which are tax exempt. cryptocurrency does not qualify for like-kind exchanges.
In any case, the IRS has never stated that crypto to crypto is taxable.
they have stated that cryptocurrency is taxable as property. property to property transactions are taxable unless they qualify as like-kind exchanges.
prior to 2018, it was arguable whether crypto to crypto transactions could be like-kind exchanges. the new 2018 tax code specifically limited like-kind exchanges to real property, so there is no longer any ambiguity.
Sorry, I chose a bad example. Replace house above with "digital house." So the 2nd example I gave, now suddenly it is taxable. But there is still no extra $20,000. You cannot sell a fraction of a digital house (in most virtual worlds).