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From the inception of Bitcoin to the current evolving cryptocurrency world in 2024, the basic concept of digital currency has remained the same: Non-custodial stay.
But as Bitcoin grows in value and more people around the world use it as an investment opportunity but also to buy and sell goods, it’s only natural that governments are taking notice. This means that cryptocurrencies in many places around the world apply to many countries. Tax laws.
But is sending cryptocurrencies to another wallet taxable?
In this article, we will answer exactly this question. We will look at what makes a cryptocurrency transaction taxable, Focusing primarily on the US but we will also look at Canada, the UK and the EU.
The point of this post is simple: Whether you trade, transfer, buy, or sell, knowing these rules will help you understand your responsibilities regarding cryptocurrency taxes.
Table of contents
Understanding Cryptocurrency Taxes – What Do I Pay Tax On?
Some crypto transactions are taxable, and it is very important to understand this. What makes a transaction taxable?
To help you understand which actions may be subject to taxes, here are some scenarios where taxes typically apply:
1. Capital gains: When you sell or exchange your cryptocurrency for a value higher than the amount you initially paid, you must declare and pay capital gains tax. For example, If you buy 1 Bitcoin for $10,000 and later sell it for $30,000, you will owe taxes on the $20,000 gain..
2. Capital losses: If you sell or exchange your cryptocurrency for less than what you initially paid, you can claim a capital loss. For example, if you buy 1 Bitcoin for $50K and then you sell it later for $10K, you can claim a loss of $40K.
3. Income tax: If you receive cryptocurrencies as income, such as through mining or staking, you are subject to income tax. The value of the cryptocurrency is taxed at the time of receipt, based on its market value.
In the United States, the IRS views cryptocurrencies as property, This means that it is subject to Same tax rules as any other form of ownership.Although it’s not necessarily tangible, you must report your capital gains and losses on your tax return, and you may also need to apply self-employment tax if you mine or store cryptocurrency as a job.
At the international level, these laws and regulations may be quite different. In Canada, cryptocurrencies are considered a commodity.Capital gains and losses are taxable. In the UK, cryptocurrencies are subject to capital gains tax.But there are some exemptions and waivers available. In the European Union, taxes on cryptocurrencies are determined by national law, and the rules vary from country to country.
Tax implications of wallet-to-wallet transfers
Wallet-to-wallet transfers are usually a straightforward way to move your cryptocurrencies, but the intent behind the transfer of your digital assets is what will indicate whether or not they are taxable.
Let’s look at this example, If you are transferring cryptocurrencies between wallets you ownthen in general, This action is not taxable.. but, If you are transferring Bitcoin or any other form of cryptocurrency to someone else’s walletMaybe as a gift then. Depending on your country and regionThis would trigger a gift tax.
Gift Tax List
In the United States, gifting any cryptocurrency worth more than $15,000 in a single year may be subject to gift tax.The gift tax exemption limit is currently $11.7 million per person… and it’s safe to say that most people won’t have to worry about going over that limit. But if you do, you’ll have to file a gift tax return and pay tax on the difference.
ℹ️ The recipient of the gift does not pay tax on the cryptocurrency received as long as its value is below the exemption threshold. They only pay tax if they later sell the cryptocurrency, which would apply capital gains tax on the difference between the market value when the gift was received and the time of sale.
Case Study: Coinbase VS. IRS
For example, take the case of the IRS winning a legal battle against Coinbase in 2019. The IRS obtained the personal information of users who made transactions worth more than $20,000 between 2013 and 2015. The government tax agency used this information to identify those users to check whether they owed taxes on wallet-to-wallet transfers.
This is an eye-opening moment for anyone investing in cryptocurrencies to not only understand the tax responsibilities you are subject to in your country of tax residence but also to raise questions about the anonymity of non-custodial exchanges as a whole.
Scenarios for sending cryptocurrencies to another wallet – do I pay taxes?
Is sending cryptocurrency to another address taxable?
➡️ If you are transferring from your wallet to another wallet of yours, you will usually not pay taxes.
Is sending cryptocurrency to a friend taxable?
➡️ If the transfer is a gift, it may be taxable depending on the amount. If it is a payment for goods or services, it is taxable as income.
Is cryptocurrency transfer taxable?
➡️ Converting one cryptocurrency to another is taxable because the values of each currency differ, which means capital gains or losses.
What are tax-exempt cryptocurrencies?
The world of cryptocurrencies as a centralized and controlled version of currency is at odds with the nature of cryptocurrencies. However, as they gain popularity, they become more accepted and regulated.
In the United States, you do not have to report digital assets or be subject to taxes if:
- Storing digital assets in a wallet or account
- Buy cryptocurrencies using US currency or any other fiat currency, including through online platforms such as PayPal and Venmo
- Transfer assets from one portfolio to another under your custody
Anonymous cryptocurrency wallets, such as Material Wallets, raise some concerns. These non-custodial wallets are designed to be private and secure, meaning ownership and transaction history are protected from agencies and tax laws.
⚠️Warning:
This doesn’t mean you’re exempt from taxes, as we saw from our previous Coinbase case study, but it does make it harder for authorities to track and tax these anonymous cryptocurrency storage solutions.
Discount on transfer fees and cryptocurrency taxes
When it comes to managing your cryptocurrency taxes, don’t miss out on the possibility of deduction.
Transportation feesThe fees that are part of almost every cryptocurrency transaction can work to your advantage. These fees It can be added to your costs, which may later reduce the capital gains tax you owe when you sell or exchange your cryptocurrencies.
According to a report by CoinTracking, the average transaction fee for Bitcoin is around $0.50, but it can vary. For example, if you buy $1,000 worth of Bitcoin and pay a $50 transaction fee, the cost will be $1,050.
Bitcoin, Ether, and USDT wallets provide a secure place to store and manage cryptocurrencies.
Taxable Cryptocurrency Overview
Buying goods with cryptocurrencies: Buying anything from coffee to airplanes with cryptocurrencies is a taxable transaction.
- Currency exchange: Trading one cryptocurrency for another is a taxable event, as the gains from the cryptocurrency used in the trade are taxed.
- Mining: Earning cryptocurrencies through mining activities is taxable and is also considered income.
- Withdraw money: Converting cryptocurrencies to fiat currency applies capital gains tax because there is a difference in value from when you first purchased the cryptocurrency until the time you cash it out.
- Make donations: Sometimes, donating cryptocurrency may not result in capital gains taxes, and may even qualify for a tax deduction based on the value donated.
To securely store all your crypto transactions, Material offers a high level of security and protection as the perfect cold crypto wallet, keeping your cryptocurrencies private and safe.
Final Summary and FAQ
Is transferring cryptocurrencies to another wallet taxable?
Transferring cryptocurrencies between wallets that you own is usually not taxable. However, transferring them to someone else’s wallet, especially if it is considered a gift or payment, means that they will be taxed depending on the amount.
How to reduce capital gains tax on cryptocurrencies?
To minimize capital gains tax, you should track your costs and include transaction fees. Hold cryptocurrencies for a year so you can use long-term capital gains tax rates, rather than short-term rates. Finally, use your losses to your advantage, which is known as tax loss harvesting.
Which countries are most tax-friendly for cryptocurrencies?
Portugal, Germany, and Singapore are known to favor crypto investors when it comes to tax policies. Portugal does not tax personal gains from the sale of cryptocurrencies, Germany allows the sale of cryptocurrencies held by an investor for more than a year tax-free, and Singapore exempts cryptocurrencies from capital gains taxes.
Do cryptocurrency exchanges report to financial regulators?
In the United States, cryptocurrency exchanges are required to report transactions to financial regulators. This is typically done to prevent money laundering and ensure compliance with tax laws. These exchanges may issue forms such as 1099-K or 1099-B to their users to facilitate tax reporting. For those looking to steer clear of these types of exchanges, your best bet is an exchange that does not require KYC.
