Is sending crypto a taxable event? What investors should know

When sending crypto to another person, you may or may not owe taxes. This is because the type of transaction will determine its tax treatment in the eyes of the Internal Revenue Service.

While the IRS’s guidelines on cryptocurrency might seem complicated, understanding them is key to ensuring accurate reporting and avoiding potential compliance issues or penalties. The world of digital assets is rapidly evolving, so staying informed about your tax obligations is all the more important. The good news is that cryptocurrency tax software can help.

In this guide, we’ll break down the specifics of crypto transfers, strategies for maintaining accurate records, and what makes sending crypto a taxable event.

Is transferring crypto between wallets taxable?

The short answer? It depends. When you transfer crypto between two wallets you own, the IRS does not view it as a taxable event. Since you retain ownership and the cost basis (the original value of the crypto) remains unchanged, there are no capital gains to report, and no income is generated.

However, one key consideration is transaction fees. If you incur fees while moving crypto between your wallets, they typically aren't deductible. But if you pay those fees using crypto, it may trigger a taxable event, as using crypto as payment is considered a disposal, potentially resulting in capital gains or losses.

Sending crypto to another person: When is it taxable?

While the IRS does not consider transferring crypto between wallets owned by the same person or entity a taxable event, transferring crypto to another person or entity can be. In other words, sending crypto to someone else’s wallet may be taxable. While gifts or donations are generally not taxable, they can have other tax consequences, such as gift tax or charitable donation deduction for qualifying donations. 

The IRS treats crypto transfers as sales when exchanged for goods or services, requiring the calculation and reporting of capital gains or losses based on the cost basis of the original cryptocurrency. For example, if you bought Bitcoin (BTC) for $10,000 and it’s worth $15,000 at the time that you use it to buy a car, you must report a $5,000 capital gain as taxable income.

Crypto gifts have specific tax rules. While they are not subject to capital gains tax for the donor (or recipient) at the time the gift is made, as of 2024, gifts exceeding $18,000 may require a gift tax return filed by the donor. While giving gifts above this amount may necessitate filing a return, taxes are only triggered if the total gifts exceed the lifetime gift tax exemption. Keeping accurate records and properly reporting the value of crypto gifts to the IRS is essential, along with using the correct IRS forms and applying the appropriate tax rates.

Donating appreciated cryptocurrency to qualified 501(c)(3) charitable organizations can have significant tax advantages for the donor, particularly because they don’t have to recognize a gain or loss on the disposal. If you have held the donated crypto for more than one year before the donation, you can deduct the fair market value of the donated crypto at the time of the donation. If you have held the crypto for one year or less, your donation is limited to the lesser of your cost basis or the fair market value at the time of the donation. Keep in mind that there are other requirements, particularly with donations of $5,000 or more. 

Are transfer fees deductible? 

Transfer fees – costs associated with moving crypto between wallets owned by the same person – are generally not deductible. However, they can affect the cost basis (the asset's original value) for tax purposes. For instance, if someone buys Bitcoin for $10,000 and pays $50 in transfer fees, the cost basis becomes $10,050. By increasing the initial investment cost, these fees can lower the capital gains tax by reducing the reported gains when the asset is sold.

Maintaining detailed records of all fees and transaction details is crucial for accurate tax reporting. The IRS requires comprehensive documentation of every cryptocurrency transaction, including transfer fees. This should include the date and time of the transaction, the amount of cryptocurrency transferred, its value at the time of transfer, and the amount of any fees paid.

Accurately calculating your cost basis for each transaction, including fees, ensures that your reported gains or losses are correct and helps prevent tax-related errors.

Wallet-to-wallet transfers vs. crypto-to-crypto exchanges

When it comes to taxable events involving cryptocurrency, it's important to distinguish between wallet-to-wallet transfers and crypto-to-crypto exchanges.

Wallet-to-wallet transfers

These involve moving cryptocurrency from one wallet to another under the same ownership, which – as previously mentioned – the IRS does not consider a taxable event. For example, transferring 1 BTC from a Coinbase account to a MetaMask wallet is simply moving assets between accounts owned by the same person. Since there is no sale or exchange of the asset, this type of transfer is tax-free.

Crypto-to-crypto exchanges

In contrast, the IRS treats exchanges of one cryptocurrency for another as taxable events. This includes transactions where you trade Bitcoin for Ethereum or any other cryptocurrency. In these cases, the IRS views the transaction as a sale of the first cryptocurrency to acquire the second, potentially resulting in capital gains or losses. For instance, if you originally bought Bitcoin for $10,000 and later traded it for Ethereum when Bitcoin’s value increased to $15,000, you must report the $5,000 capital gain as taxable income.

It's important to note that all crypto-to-crypto transactions must be reported on tax returns, even if the cryptocurrencies are not converted to fiat currency like USD. Remember, the IRS considers each exchange a taxable event, like selling one stock to buy another.

Streamline crypto tax reporting with CoinTracker

Understanding the complexities of crypto taxes can be challenging. Fortunately, crypto tax software like CoinTracker simplifies the process. By importing your wallets and exchanges into the platform and applying the appropriate U.S. tax settings, your transactions are automatically categorized in your tax reports.

CoinTracker supports integrations with over 500 exchanges, wallets, and NFTs, and covers 23,000+ DeFi smart contracts. It’s the only platform with full Coinbase coverage and offers real-time performance tracking, tax-loss harvesting, and year-end tax reporting – everything included in your subscription. Transactions can be imported via API or CSV to ensure your portfolio stays accurate and up to date.

Get started for free and discover how CoinTracker makes managing crypto taxes easier, turning potential challenges into straightforward tasks.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.