April 6, 2022

Converting Crypto: Taxable or Not?

Written by Mark Kang, CPA Updated April 6, 2022

 

Simply put, it depends on each case scenario. For example, purchasing 1 BTC with fiat currency (fiat to crypto) is not a taxable event. However, converting the 1 BTC you purchased into 3 ETH (crypto to crypto) is a taxable event because it generates a capital gain or loss. 

When determining whether a crypto event is taxable, you should first understand that the IRS classifies cryptocurrency as property, not currency. This is why many crypto-related incomes are classified as capital gains and are subject to capital gains or ordinary income taxes. Let’s find out which crypto events are taxable and which are not in the following examples. 

Taxable EventsNontaxable Events

Crypto to crypto

Selling crypto (crypto to crypto)

Fiat to crypto

Transferring crypto between your own storage (exchange, wallet, etc.)

 


1. Crypto to Crypto: Taxable Event

Is converting one crypto to another a taxable event? The IRS clearly stated in June 2021 that converting crypto to crypto is a taxable event. 

This is because converting crypto is not recognized as a simple exchange between cryptocurrencies. Rather, it’s considered a disposal of the cryptocurrency you had to purchase a different cryptocurrency.

E.g.) Suppose you purchase 0.5 BTC at $15,000 and convert this 0.5 BTC into 4 ETH nine months later. At this time, the price of 1 ETH is $4,000 for a selling price of $16,000. 

$16,000 (Selling price) – $15,000 (Cost basis) = A $1,000 short-term capital gain is subject to taxes.

 

2. Crypto to Fiat: Taxable Event 

Cashing out your cryptocurrency is a taxable event.

E.g.) Suppose you purchase 10,000 DOGE for $0.50 each, then you cash it all out seven months later for $0.30 each. Your cost basis is $5,000 and your selling price is $3,000.

$3,000 - $5,000 = You can claim a $2,000 short-term capital loss on your taxes.


Your capital loss will offset other types of income and reduce your tax liability. Check out this blog post for more information.


3. Fiat to Crypto: Nontaxable event 

In other words, this is purchasing cryptocurrency with cash.

E.g.) Suppose you purchase 1 BTC at $35,000 and have not sold it yet. A simple purchase is not a taxable event.


4. Transferring crypto to wallet or exchange: non-taxable

Transferring cryptocurrency you possess to your own wallet or account at an exchange is not a taxable event.

E.g.) Suppose you transfer 2 BTC from your exchange account to a wallet you own. This is not a taxable event. 


Remember, you can always refer to the IRS’s FAQs or our Crypto Tax Guide to better understand crypto tax reporting in general. 

Did you convert crypto or have any other taxable events? If so, get started to prepare your crypto tax report with Cointelli. Manually reporting your crypto taxes on your own is nearly impossible, so we strongly recommend using our Cointelli software—it was designed by a crypto expert CPA with your needs in mind!

 

Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!

 

DISCLAIMER: This post is for informational purposes only and should not be interpreted or relied upon as a substitute for the advice of financial, legal, or tax professionals. This content also only addresses U.S. federal income tax consequences for U.S. citizens and residents and does not address tax consequences that may be relevant to a particular person subject to special rules, such as dealers or traders. You should consult with your own financial, legal, or tax professionals to report and file your crypto taxes or make decisions on your particular circumstances. The laws, regulations, or interpretation of the existing laws could change, which may adversely affect either prospectively or retroactively. The content of this post is subject to changes.
About the Author
Mark Kang, CPA
CEO & Co-founder of Cointelli
Mark Kang is a CPA with a Ph.D. in Physics. He helped build Cointelli’s foolproof formula for accurate crypto tax reporting. Passionate about crypto tax topics, Mark is here to share the knowledge.

Previous
All About Crypto Airdrop Taxes (With Examples)
Next
How to Report Crypto Mining Taxes
About the Author
Mark Kang, CPA
CEO & Co-founder of Cointelli
Mark Kang is a CPA with a Ph.D. in Physics. He helped build Cointelli’s foolproof formula for accurate crypto tax reporting. Passionate about crypto tax topics, Mark is here to share the knowledge.
Share

Ready to get
your report?

To get started, simply sync your wallets and exchanges.