Is there a tax implication when moving cryptocurrency between wallets in the United States?
In light of the security risks associated with cryptocurrencies, it is prudent for investors to utilize various wallets, ranging from hot wallets to cold wallets such as Ledger or Trezor.
To enhance security and diversify holdings, individuals often find themselves transferring crypto assets between wallets. This practice, however, raises questions about the potential tax implications of such transactions.
We will delve into the taxation of cryptocurrency in the US, explore whether transferring crypto between wallets incurs taxes, and more!
How is crypto taxed in the US?
In the United States, the taxation of crypto trading falls under the purview of capital gains taxes, irrespective of whether you exchange crypto for another crypto, FIAT, or an NFT.
For those who retain crypto for a period exceeding 12 months before divesting, the applicable tax rate is the long-term capital gains tax, which spans from 0% to 20%.
Conversely, if you retain crypto for less than 12 months before divesting, the relevant tax rate is the short-term capital gains tax, ranging from 10% to 37%.
Any form of crypto-related income, including crypto interest, staking rewards, airdrops, hard forks, and crypto salaries, is subject to taxation at the income tax level.
Do I have to report wallet transfers on my tax return?
Reporting wallet transfers on your taxes is not required; instead, focus on disclosing the gains or losses from each cryptocurrency trade and any crypto income received throughout the year.
For every crypto sale, it is essential to calculate the gain or loss individually and report it on the appropriate tax forms, such as Form 1040 and Form 8949.
When reporting crypto income, provide the Fair Market Value (in USD) for each batch of income received during the tax year.
Is moving cryptocurrency between different wallets taxable?
Moving cryptocurrency between different wallets is not taxable in the US if those wallets belong to you, while if you sell any of your holdings, you’d have a taxable event.
What if the crypto that you hold has gained in value? Or can you deduct transferring fees?
Let’s look at a scenario that most crypto holders face when transferring crypto between wallets and if it is taxable.
Transferring crypto to your own wallet
Let’s look at a simple situation most crypto holders face when transferring crypto yo your own wallets and its possible taxation.
There’s a lot of confusion on which crypto transactions are taxable or not. For clarification on your tax obligations as a crypto holder, check out our comprehensive guide about which crypto events are taxable.
Transferring crypto to someone else’s wallet
Transferring crypto to another wallet has three possible cases: gifting to a friend, donating to a charity, or buying something and needing to transfer.
Now, let’s discuss if these situations are taxable events in the US.
When is sending crypto to another person not taxable?
If you send cryptocurrencies (without selling any of them) to someone else (e.g., a friend), you’re essentially gifting crypto to that person.
Gifting crypto in the US isn’t taxed. No extra reporting is required if the gift is below $17,000 (2023 limit).
Exceeding this limit requires filing a gift tax return, but the act of gifting itself is not taxable.
If you transfer crypto to a charity, you’re donating crypto. Donating crypto is not a taxable event, and you can even get a tax deduction if you donate crypto to a charitable organization. Then, you can claim an itemized tax return and lower your gains with that tax deduction.
When is sending crypto to another person taxable?
If you buy something with crypto and you transfer that crypto in exchange for a product/service, that transfer would be considered a sale (conversion) of that crypto.
You’d need to determine the gain/loss on that crypto based on its holding period and be subject to capital gains taxes depending on that.
So, on top of the amount spent to buy the product/service, you’d probably need to add taxes if you add a gain on that crypto.
Are crypto transfer fees tax deductible?
There are different types of fees for crypto transactions, and depending on their nature, they can be tax deductible or not. Let’s cover the differences.
Can I deduct fees from wallet-to-wallet transfers?
There are two transaction fees: Network fees for transferring coins and sales commission for crypto transactions.
In the US, transferring coin fees are no longer tax-deductible for individual investors under current tax law.
Even if transferring Bitcoin between wallets is not taxable, you still have expenses concerning fees.
Are crypto-to-crypto transactions taxable?
Trading cryptocurrencies for other cryptocurrencies is taxable in the US. It’s a disposal of assets. Transferring between wallets is just moving assets.
Crypto-to-crypto trades are taxable. They’re subject to capital gains taxes. The tax rate depends on how long you held the crypto.
Over 12 months means long-term capital gains tax, 0% to 20%. Less than 12 months means short-term capital gains tax, 10% to 37%.
Tracking gains from crypto-to-crypto trades is complex. It’s harder than crypto-to-FIAT trades.
You’re trading within crypto but need to determine gains/losses in FIAT (e.g., USD). Crypto tax software helps automate this process.
Why wallet-to-wallet transfers can cause tax issues in the US
You cannot confuse transferring crypto between wallets and selling/converting any of your assets for other assets. However, if you transfer crypto a lot between wallets, you may have to pay a lot of fees on those transfers and may be able to get a deduction.
However, you have to fit some requirements and keep proper track of those transfers.
Good practices for record keeping for wallet transfers
Import your transactions regularly using a crypto tax tool.
CoinTracking allows you to import transactions from various sources like exchanges and wallets.
Stay informed about all your trades and the fees paid for each transaction.
Conclusion
Transferring crypto between wallets isn’t taxed. If your crypto gift exceeds the annual exclusion, file a gift tax return.
Trading crypto requires reporting gains/losses and income from crypto activities.
Keep track of transactions and use CoinTracking for easy tax filing.