Ask HN: How have you dealt with taxes (U.S.) and algo crypto trading?

For those who have algo traded crypto currencies in the last year or so, has the tax burden (U.S.) been too unbearable to make it worthwhile? The IRS is one of the most powerful and terrifying government agency, so I am having fears that may be unfounded. I plan on talking to an tax authority of some sort, but wanted to get some feedback from the community who've been through this.

Here is my dilemma:

I have promising code I'd like to start trialing, but when I do the math, it only makes money assuming no taxes per trade, which I haven't factored in. That's because I can't grok the taxes, and how they will be calculated.

Given my naive understanding of how it is supposed work, it's possible even though I might gain fractions of a bitcoin by end of day, I could owe the IRS thousands of dollars I didn't make.

Here is a toy scenario (numbers are fake to keep it simple):

1) 10:00 am: 1.0 BTC -> 1.1 LTC (trade 1 bitcoin for 1.1 litecoin)

2) 11:00 am: 1.1 LTC -> 1.2 BTC

3) 12:00 pm: 1.2 BTC -> 1.3 LTC

If the value of BTC, is $1000 at 10 am, then rises to $2000 at 12 pm, that is a gain of $1000. By buying the LTC at 12 pm, it seems I would owe taxes on the "gain" in BTC of $1000, even if I only gained 0.2 BTC ($400). As I understand it, the taxes are owed based on the relative gain in dollar value, not on absolute bitcoin gain.

The taxes could easily wipe out any gains, or worse, cause me to owe money I didn’t make. I can’t decide whether even to test the code, as I fear accidentally incurring a high tax bill.

1) Are my fears unfounded?

2) If I make thousands of these tiny trades per day, could I potentially owe more in dollars than I virtually gained, or am I seriously mistaken?

3) In practice, I’ll be trading other currencies too which are not traded against the dollar. How have others estimated the dollar value of such currencies at the time the trade was executed?