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.
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.
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If you need personalized help reviewing your transactions or preparing your US tax returns, check out our CoinTracking Full Service, provided by a team of crypto tax professionals led by Sharon Yip, the export CPA who helped us put together these insights.
Check our guides on how to comply with crypto taxes:
Do you pay taxes on crypto trades?
How to report crypto in your taxes?
Earn Interest on Crypto: The Taxes Guide.
Do you pay taxes on Bitcoin debit cards purchases?
How to calculate taxes with Bitcoin dollar-cost averaging?
How Crypto tax laws save money for Bitcoin hodlers
2021’s NFT guide (with taxes).
Is Bitcoin taxable? The ultimate guide for 2021 taxes.
Tax implications of getting paid in Crypto.
Bitcoin Millionaire? An inheritance plan for wealth.. with taxes.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.