Cryptocurrency

What to Know About Crypto Tax & Transferring Between Wallets

If you’re involved in the world of cryptocurrency, you’ve likely explored the internet for information on a reliable crypto tax calculator, safely storing your cryptocurrency, how crypto is taxed, finding a cryptocurrency accountant, etc. When it comes to storing and transferring your investments, do you know whether you may need to pay taxes on wallet-to-wallet transfers?

It’s not uncommon for crypto investors to transfer their coins across exchanges and wallets. In certain situations, these transfers can result in tax reporting issues of which you should be aware. Our team at Founder’s CPA can break down what you need to know about these transfers and how to avoid tax-related issues in the future. 

Understanding Cryptocurrency Taxes

Before we dive in, let’s start with the basics on cryptocurrency taxes. When you dispose of your crypto, such as if you sell it, trade it, or use it to make a purchase, you’re responsible for paying a capital gains tax. On the other hand, when you earn cryptocurrency, you recognize it as ordinary income. This includes airdrops, mining, and staking. 

What About Moving Crypto Between Wallets?

If you didn’t already know, when you move cryptocurrency between wallets that you own, this isn’t considered to be a taxable event. In this case, your cost basis and your holding period don’t change when completing a wallet-to-wallet transfer. The original cost that you incurred when acquiring your cryptocurrency will be your cost basis, and the same is true for your holding period. However, make sure to keep accurate records of your transactions to avoid tax issues. 

Understanding Crypto Transfer Fees & Tax Deductions

In some cases, fees can be added to your cost basis which minimizes your capital gains tax. If your transaction meets one of the two conditions, you’ll usually be able to apply expenses to the cost basis of the property:

  • It’s a necessary part of buying or selling the property
  • It increases the overall value of the property

Because the IRS hasn’t gotten specific about wallet-to-wallet transfers, you can take various approaches when reporting wallet-to-wallet transfer fees. Conservatively, it’s best to treat all wallet-to-wallet transfers as non-taxable as they’re not directly tied to buying or selling your crypto. 

Crypto-to-Crypto Transactions

Separate from between-wallet transfers is crypto-to-crypto transactions. This means that one cryptocurrency such as Bitcoin is traded for another such as Ethereum. Depending on how your value has changed since you originally received them, you’ll need to pay either a capital gain or loss. Having a crypto tax calculator can significantly help ensure that your transactions are taxed in the right way, helping to keep your costs accurate and allowing you to submit your tax return with confidence. 

Avoid Potential Issues with Founder’s CPA

Wallet-to-wallet crypto transfers can be tricky and cause crypto tax issues when not handled properly. One of the best ways to avoid these frustrating issues is by working with a crypto tax accountant who knows the ins and outs of the law. Our experienced team is happy to assist you with all of your crypto tax needs this tax season and beyond. Take advantage of our free consultations today!

Curt Mastio

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