So in your scenario

Buy 1 ETH for say $500, your cost base is $500.

If then trade the 1 ETH for bitcoin, it only depends on what ETH is worth at that moment.

If 1 ETH is now worth $400, then you have a $100 loss, if ETH is worth $500 then no taxable gain or loss, if 1 ETH is wroth $600 then you owe tax on $100 of capital gains.

What bitcoin is worth is irrelevant until you sell the bitcoin.

EDIT Just assume that every transaction between crypto currencies has an implicit, convert to USD first and then buy the other Crypto with USD.

Also, There is always a USD price, what the price is, is a bit of an art, but its what ever price you can convince the IRS of.

This is wrong for cryptocurrency, at least for Bitcoin. Because bitcoin is an asset for tax purposes, each coin (meant here as any quantity of cryptocurrency, not a specific unit) is subject to an individual tax computation, so you must use the actual price paid for each coin as the basis for computing taxes. You must also compare each coin's basis against the actual selling price of that coin at the time sold.

Note that this is generally also how you calculate gains/losses related to foreign currencies.

Neither does buying pounds in euros, but you'll still calculate your taxes in USD.

Like an exchange I did just this morning: $10,000 VHDYX -> $10,000 VFIAX.

It creates two orders a sell and a buy. I'm taxed capital gains on the $10k sale (about $600 gain) and the buy has nothing to do with it, until I sell it in 5 years.

Let's not kid ourselves... Nobody is going to be reporting crypto-to-crypto exchanges.

Premeditated tax-negligence is fraud according to the IRS, but the thinking remains.

How many convictions will it take? Depends on how much is on the line.

[1] Currently that means excluding items individually or collectively worth more than 25% of the gross income actually stated on the return.

[2] If your omission of crypto-currency income is within 25% of your actual stated gross income, the IRS only has 6 years to audit you and assess penalties...unless they decide that the omission is a deliberate attempt to evade taxes, in which case the unlimited statute of limitations could apply.