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Tax Accounting
Is the wallet yours or someone else's? If it's yours, no tax is due. If it's someone else's, you'll incur capital gains or losses. Here's what you need to know.
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Trevor Ward
It depends on what you mean by “another wallet”.
Is the wallet yours?
If you’re sending crypto to another wallet that you own, it’s not subject to any taxes and you don’t need to disclose it in your tax return.
Is the wallet someone else’s?
If you’re sending crypto to another wallet that is not your own, the transaction is subject to capital gains tax and your tax rate depends on how long you held and the price difference between when you bought and when you sent it.
How long did you hold?
Crypto held for 365 days or less will be classified as short term and those held for more than 365 days will be classified as long term.
Do you have capital gains or losses?
Whether you pay taxes will depend on if the price increased since you bought it, resulting in capital gains, or decreased, resulting in capital losses.
To figure this out, you’ll have to identify the date you bought the crypto you want to send and compute your cost basis, or what you paid to purchase your crypto. The HIFO method is typically best if you bought crypto multiple times before selling.
You pay taxes only when you have capital gains - and at different rates based on how long you held
If the crypto you’re sending to another wallet was held for one year or less and it increased in price since you bought it, you’ve incurred short term capital gains and the tax rate you pay is the same as your income tax rate. Check the table below:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 10% | Up to $10,275 | Up to $14,650 | Up to $20,550 | Up to $10,275 |
| 12% | $10,276 to $41,775 | $14,651 to $55,900 | $20,551 to $83,550 | $10,276 to $41,775 |
| 22% | $41,776 to $89,075 | $55,901 to $89,050 | $83,551 to $178,150 | $41,776 to $89,075 |
| 24% | $89,076 to $170,050 | $89,051 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 |
| 32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
| 35% | $215,951 to $539,900 | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 |
| 37% | Over $539,900 | Over $539,900 | Over $647,850 | Over $323,925 |
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 10% | $0 to $11,000 | $0 to $15,700 | $0 to $22,000 | $0 to $11,000 |
| 12% | $11,001 to $44,725 | $15,701 to $59,850 | $22,001 to $89,450 | $11,001 to $44,725 |
| 22% | $44,726 to $95,375 | $59,851 to $95,350 | $89,451 to $190,750 | $44,726 to $95,375 |
| 24% | $95,376 to $182,100 | $95,351 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 |
| 32% | $182,101 to $231,250 | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $231,251 to $578,100 | $462,501 to $693,750 | $231,251 to $346,875 |
| 37% | $578,126 or more | $578,101 or more | $693,751 or more | $346,876 or more |
The tax rate for long term capital gains is based on the amount of gains. The tax rate varies between 0% to 20%. Check the table below:
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 0% | Up to $41,675 | Up to $55,800 | Up to $83,350 | Up to $41,675 |
| 15% | $41,676 to $459,750 | $55,801 to $488,500 | $83,351 to $517,200 | $41,676 to $258,600 |
| 20% | Over $459,750 | Over $488,500 | Over $517,200 | Over $258,600 |
| Tax Rate | Single | Head of Household | Married Filing Jointly | Married Filing Separately |
|---|---|---|---|---|
| 0% | Up to $44,625 | Up to $59,750 | Up to $89,250 | Up to $44,625 |
| 15% | $44,626 – $492,300 | $59,751 – $523,050 | $89,251 – $553,850 | $44,626 – $276,900 |
| 20% | Over $492,300 | Over $523,050 | Over $553,850 | Over $276,900 |
Note that the period during which you held the crypto begins on the day after you acquired it and ends on the day you send it.
Example
Quentin sent 1 Bitcoin to someone else’s wallet. He purchased this Bitcoin 5 years ago for $9,700.28 and the day he sent it, one bitcoin was worth $24,197.13 therefore Quentin had a capital gain of $14,496.85.
$24,197.13 - $9,700.28 = $14,496.85
Since the holding period was more than one year, he is subject to long term capital gains according to the long term capital gains table above.
You can use capital losses to reduce capital gains
If it turns out that the crypto you sent was worth less than what you paid for it, you have a capital loss. You won’t have to pay taxes, but should still report this to the IRS because it can reduce your overall tax bill. You can subtract your losses from your gains to shrink the total amount subject to capital gains tax.
The IRS will let you deduct up to $3,000 of capital losses (or up to $1,500 if you and your spouse are filing separate tax returns). If you have any leftover losses, you can carry the amount forward and claim it on a future tax return.
IRS forms to use
You would report capital gains or losses on Form 8949, Sales and Other Dispositions of Capital Assets, and then summarize capital gains and deductible capital losses on Form 1040, Schedule D, Capital Gains and Losses.
Remember to keep good records
You—the taxpayer—are responsible for reporting your cost basis information accurately to the IRS. You ought to maintain all of the following information:
- Date and time each unit was acquired/purchased
- The fair market value of each unit at the time it was acquired
- Date and time each unit was sold, exchanged, or otherwise disposed of
- The fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit
It is next to impossible to maintain all these documents manually. Thus, to automate these requirements you should use crypto accounting software like Bitwave to ensure compliance.
Header photo by Shubham Dhage on Unsplash
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Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
