Is it taxable to move crypto between wallets?
Do you have a question about whether or not your wallet-to-wallet transfers need to be taxed?
Many crypto investors have moved their coins to various wallets and exchanges. In certain cases, these sorts of transfers may create tax reporting difficulties.
In this article, we’ll break down everything you need to know about the tax consequences of wallet-to-wallet transfers (as well as a simple approach to avoid future tax difficulties).
What are the tax implications of cryptocurrency?
Cryptocurrency is taxed similarly to other assets, with the exception of capital gains.
Is it subject to tax when I move cryptocurrency from one wallet to another?
It is not taxable to move cryptocurrency between wallets that you own.
The cost basis and holding period of your assets do not alter when you perform a wallet-to-wallet transaction. Your original investment cost will be used as your cost basis. The time you first acquired your coins will be recorded as your holding period.
The IRS, however, does not consider cryptocurrency to be actual currency. This means that you may have to pay taxes on your Bitcoin gains if you sell it. But the good news is that because cryptocurrencies are a type of virtual money and don’t resemble real cash at all when they’re exchanged, they do not incur capital gains tax in the United States.
Is it possible to deduct crypto transfer costs?
In some situations, cryptocurrency costs may be subtracted from your cost basis, resulting in a lower capital gains tax liability.
If your transaction satisfies one of the following criteria, you can typically apply costs to the property’s cost basis.
It is an essential step in the buying or selling of a property.
It increases the property’s real value.
The IRS hasn’t said whether fees for wallet-to-wallet transfers fulfill these criteria. As a result, depending on your risk tolerance, you may take various approaches to record charges for wallet-to-wallet transactions.
If your wallet-to-wallet transaction gives you access to different crypto assets, the aggressive strategy is to use transfer fees to raise your cost basis.
To minimize your tax burden, many experts advise you to treat all wallet-to-wallet transfers as non-deductible since they are not directly connected to purchasing or selling cryptocurrencies.
Is it okay to exchange cryptocurrencies for other currencies in a crypto-to-crypto manner? Is currency trading between different virtual coins taxable?
Moving your cryptocurrency across wallets is not the same as performing a crypto-to-crypto trade, where one currency is given for another. Taxation on crypto-to-crypto trades is distinct from wallet-to-wallet transfers.
Because you’re selling cryptocurrency in a crypto-to-crypto trade, you’ll have a capital gain or loss if the value of your coins has increased since you acquired them.
Why wallet-to-wallet transfers can cause tax issues
While wallet-to-wallet transfers are not taxable, they may result in tax difficulties in certain situations.
Consider the following example.
David’s profit is $5,000 in this scenario. If David hasn’t maintained proper records on his cost basis, it’s probable that the whole proceeds of his sale will be considered a capital gain – in this case, $15,000.