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 Events||Nontaxable 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.
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.
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!