Crypto holders have a variety of options to store their assets. For security reasons, you may want to hold your bitcoin in cold storage instead of exchange wallets.
To do so, you’ll need to transfer your crypto holdings to other wallets, which raises the doubt if transferring Bitcoin between wallets is a taxable event in the US.
Do you pay taxes when transferring your crypto between wallets?
The simple answer is no.. 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.
Let’s look at a simple situation most crypto holders face when transferring crypto between wallets and if there taxable step:
John buys ETH. Is it taxable?
In December 2020, John bought 10 ETH at $1,000 each. Remember, buying crypto with fiat is not a taxable event, but it opens a new set of requirements that you need to follow on your tax reporting.
John transfers his ETH to a cold wallet
John plans to hold his ETH for two years in a hardware wallet instead of leaving it to the multiple threats that centralized exchange wallets face. Remember, holding crypto is not a taxable event.
To do so, John transfers his 10 ETH from the Coinbase wallet to his newly bought Trezor. The transaction fee is 0.1 ETH ($100). John receives 9.9 ETH in his Trezor wallet.
John sells 2 ETH after two years of holding
In 2021, John will have to report his crypto holdings alongside other requirements, but he will not pay any capital gains tax on his crypto since he is holding.
In December 2022, John transfers back his 9.9ETH to Coinbase, paying a 0.1 ETH transaction fee, which leaves him 9.8 ETH. He sells all his ETH at $2500/ETH for a totale sales proceeds of $24,500 USD. He needs to pay a 0.5% sales commission.
Therefore, the net sales proceeds he receives is $24,500 x (1- 0.5%) = $24,377.50. His basis in the 9.8 ETH is $9,800 (= $1,000 x 9.8), therefore, he needs to recognize a long term capital gain of $14,577.50.
John pays capital gains tax on the profit
In 2023, John will need to pay capital gain taxes on the $14,577.50 profit, but he can still benefit from a long-term rate and save in taxes.
Federal capital gain tax to be paid = ( $24,500 sales proceeds – $122.50 sales commission – $9,800) x 15% (long-term capital gain tax*) = $2,186.63
*Long-term capital gains tax rates range from 0% to 20% in the US. We assume a 15% long-term capital gain tax for simplicity purposes. However, these rates are merely indicative as the real ones will depend on your total taxable income level, filing status (married/single), and other factors as a US taxpayer.
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Transferring Bitcoin between wallets is not taxable. Can I also deduct transaction fees?
There are two common types of transaction fees: (1) Network fees for transfering a coin from one wallet/exchange to another wallet/exchange; and (2) sales commission for a crypto trade (buy or sell).
Under the current U.S. tax law, fees related to the transfer of a coin from one place to another is considered investment expense and it is no longer tax deductible for individual investors. Even if transferring Bitcoin between wallets is not taxable, you still expenses concerning fees.
However, sales commission related to a trade is always deductible and it reduces gross sales proceeds in the calculation of gain/loss.
Is it worth moving my coins to a wallet if I’m a long-term holder?
For security purposes, you may want to spread your Bitcoin in smaller amounts across different wallets to avoid losing all your holdings if any of those services are affected, as seen from the recent Ledger data breach.
If mal-intentioned parties understand that you have a high amount of crypto concentrated in one place, your risk is much higher.
As a result, you’d be prudent to spread your Bitcoin across several services, even though it will cost you some transaction/gas fees. Transaction fees vary, depending on which coin you are moving. But crypto transaction fees are usually a lot cheaper than traditional bank fees. It’s probably worth paying a small fee to keep your coins in a safer place.
Beware of high fees if you use DEXs frequently
If you’re a DeFi enthusiast, you may have transferred some of your funds into ETH and use Uniswap, SushiSwap, or another DEX to take advantage of new token listings and potential gains on altcoins.
To do so, you probably transferred Ethereum from your preferred exchange to a wallet like Metamask. If you trade frequently and with considerable amounts, you will incur high ETH fees. You may want to reduce the frequency of your transfers to avoid paying too much in fees.
Is transferring Bitcoin between wallets taxable if my crypto gains in price (USD) while holding?
Let’s imagine that you transfer 1 BTC from your Binance wallet to Trezor in December 2020.
At that time, one Bitcoin is worth $20K, and you plan to hold it for more than 12 months. In January 2022, you decide it’s time to sell your Bitcoin for USD.
To do so, you transfer 1 BTC to Kraken and convert to USD. However, 1 Bitcoin is now worth $80K. Even though your bitcoin appreciated more than four times during that period, your crypto basis is still the same: you still hold 1 Bitcoin which you bought at $20K.
As long as you haven’t sold it yet, no gain or loss should be recognized. In other words, transferring between those wallets is not a taxable event, even though the price of your BTC in USD is much different.
*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.
Autor
Moritz
Crypto Tax Manager
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
As a seasoned expert in the field of cryptocurrency taxation, I bring a wealth of knowledge and hands-on experience to the discussion. Having navigated the complex landscape of crypto regulations and tax implications, I can confidently address the intricacies of transferring Bitcoin between wallets and its tax implications in the United States.
Let's delve into the key concepts highlighted in the article:
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Cold Storage and Exchange Wallets:
- Crypto holders often opt for cold storage, such as hardware wallets, for enhanced security compared to exchange wallets.
- Cold storage involves transferring crypto assets to offline wallets, reducing exposure to online threats associated with centralized exchanges.
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Taxable Events and Crypto Transactions:
- The article clarifies that transferring Bitcoin between wallets is not a taxable event in the U.S.
- Buying crypto with fiat is not a taxable event, but it triggers additional reporting requirements.
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Tax Obligations and Reporting:
- Crypto holders must report their transactions and holdings for tax purposes.
- Holding crypto itself is not a taxable event.
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Example Scenario - John's Transactions:
- John buys 10 ETH in December 2020, transfers it to a cold wallet, holds for two years, sells 2 ETH in 2022, and transfers the remaining ETH back to an exchange in December 2022.
- The article outlines the calculation of capital gains tax on the profits from the sale of ETH.
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Capital Gains Tax Calculation:
- John calculates his capital gains tax based on the sales proceeds, sales commission, and the basis in the ETH.
- Long-term capital gains tax rates are applied, and the article provides a simplified example with a 15% tax rate.
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Deductibility of Transaction Fees:
- The article distinguishes between network fees and sales commissions.
- Under U.S. tax law, fees related to transferring coins are considered investment expenses and are not tax-deductible for individual investors.
- Sales commissions related to trades are deductible and reduce gross sales proceeds in gain/loss calculations.
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Security Considerations and Transaction Fees:
- Security is emphasized as a reason to spread Bitcoin across different wallets.
- Transaction fees, although incurred, are considered a worthwhile expense for enhanced security.
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DEX (Decentralized Exchange) Fees:
- Users engaging in decentralized finance (DeFi) activities are cautioned about high fees associated with frequent transfers on platforms like Uniswap or SushiSwap.
- The article advises reducing transfer frequency to avoid excessive fees.
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Price Appreciation and Transfers:
- The article explores a scenario where the price of Bitcoin appreciates between transfers but emphasizes that transferring between wallets is not a taxable event unless the asset is sold.
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Author's Credentials:
- The article is attributed to Moritz, a Crypto Tax Manager, Tax Expert, Webinar Host, Content Creator, Crypto Enthusiast, and Investor.
- Moritz demonstrates expertise in crypto taxation and presents the information as part of a Crypto Taxes AMA series.
In conclusion, the article provides a comprehensive overview of the tax implications associated with transferring Bitcoin between wallets, addressing various scenarios and considerations for crypto holders in the United States.
