Transferring crypto between wallets might be taxable, but it all depends on who owns the wallets. If you are transferring crypto between wallets that you own, then it is not a taxable event.
However, if you are transferring crypto to a wallet you do not own, the answer becomes more complicated. And we will explore this deeper for situations where you send crypto to friends, family, or to fund alternative investments.
Improper tax reporting can lead to paying penalties. So make sure to consult your tax professional to understand how these rules might apply to your situation.
Is sending crypto to another wallet taxable?
Sending cryptocurrency to another wallet is not taxable if it is your own wallet. As per the IRS Frequently Asked Questions about virtual currencies:
If you transfer virtual currency from a wallet, address, or account belonging to you, to another wallet, address, or account that also belongs to you, then the transfer is a non-taxable event, even if you receive an information return from an exchange or platform as a result of the transfer.
If you send Bitcoin or another crypto to friends or family as a gift, it is not taxable if the fair market value is under $17,000 in 2023. It is also not considered taxable income for the recipient, either.
If you send crypto to another wallet you do not own to make a purchase of goods or services, then this is taxable. The transaction will be subject to capital gains tax. However, if the purchase is a tax deduction you may also potentially write off the full value of the purchase.
Is sending crypto to another person taxable?
We have already covered that sending a gift up to $17,000 per recipient isn't a taxable event in the US during the 2023 tax year. So sending crypto to another person as a gift is not taxable.
However, if the gift exceeds $17,000 for a recipient, then you need to file a gift tax return.
If you are sending one cryptocurrency to another person, and they send you another cryptocurrency this is considered a crypto exchange. Even though it is done over-the-counter or OTC, it does have tax implications.
If you are sending tokens to another person to fund an alternative investment, or to provide a loan it might not be taxable if your expectation is to have the funds returned.
However, if you do receive more tokens back, then you have to pay tax. You will pay your income tax rate on any interest earned.
How To Calculate Your Crypto Taxes
If you are sending tokens from one wallet to another and it is taxable, this will be a capital gains event on your tax return.
I recommend using crypto tax software to track your trades and do your capital gain or loss calculations. However, it is usedul to understand how to calculate crypto tax on your own.
The way to calculate capital gains and losses from crypto is:
Value of tokens at disposal - Cost Basis of your tokens = Gain or loss
The cost basis is the fair market value of your crypto when you acquired it.
A token is 'disposed of' if you trade it for dollars, another crypto token (including NFTs), pay gas fees or other costs, or exchange for goods or services.
Capital gain taxes in cryptocurrency and Bitcoin explained
Let's take a simple example.
You purchased 1 ETH for $1000. Your cost basis is $1000
A year later you sold 1 ETH for $2,000. The value of tokens at disposal is $2,000.
$2,000 - $1000 = $1,000 capital gain.
So how much would you pay in tax on this capital gain?
It depends on the long-term capital gains tax rates in your country since the tokens were held for longer than 12-months.
Are crypto transfer fees tax deductible?
Crypto transfer fees and gas costs are tax deductible even if you are transferring crypto between your wallets.
You cannot, however, use transfer fees to offset income on your tax bill. The way that transfer fees reduce your overall tax is by being deducted from your capital gains.
Which Crypto Transactions Are Considered Taxable?
You pay taxes on crypto transactions when they fall into the following categories:
Crypto Gains Transactions
Any disposal of crypto can be considered a taxable event. This would include:
- Buying goods or services.
- Trading one crypto for another.
- Trading crypto for fiat currency.
Income Tax Transactions
Receiving crypto can be considered an income tax event. This would include:
- Receiving interest for supplying crypto to a lending network like Aave.
- Getting paid in crypto for goods or services.
- Staking rewards.
Best Way to Do Your Crypto Taxes
The best way to do your crypto taxes is to consult a crypto tax expert. Whether you use a crypto tax expert or not, a crypto tax software can help.
If you prefer to do your own taxes, after you set up a crypto tax software you must make sure all of your transactions are accurately labeled and reconciled.
This is a time-consuming and manual process, so do not leave it until right before your tax forms are due! Make sure to budget about 1-hour per 50 transactions you need to review. That means 20 hours to do 1000 transactions!
Want Help Fixing Your Crypto Transactions?
If you want an expert review of your crypto activities, and to have accurate crypto tax reporting you can request a free crypto tax review from our team.
We will help you set up your crypto tax software, review your transactions for costly errors, and give you a flat rate quote for the work that costs way less than other accountants.