To date our articles have explored topics that result in an individual recognizing gains or losses because of the sale or exchange of a crypto position. However, not all actions an individual takes with a crypto position results in a recognition of gains or losses. In this article we discuss the most common action taken in the crypto ecosystem that does not result in the recognition of gains or losses for an individual.
The IRS is clear that transferring crypto between wallets that the individual owns has no tax consequences on the individual. This is logical just as an individual transferring money between bank accounts controlled by the same individual would have no tax consequences. The same reasoning is applied to crypto transfers between wallets controlled by an individual.
Let’s look at a quick example to illustrate the point. McGee purchases 100 bitcoins from Mt. Gox in May 2012 for $3,000. Shortly after his purchase McGee becomes concerned with the Mt. Gox security so he transfers his bitcoins to a hardware wallet. In 2021 McGee sees the price of bitcoins has skyrocketed since his original purchase. He begins to look into the possibility of selling a portion of his bitcoins and learns one avenue to do this is to setup an account on an exchange (i.e. Coinbase, Binance, or Kraken). McGee transfers 25 of his 100 bitcoins onto the exchange to prepare to sell that portion of his bitcoins. However, shortly after transferring the bitcoins onto the exchange, McGee becomes optimistic about bitcoin’s future so he decides to transfer the bitcoins to a new, more secure cold storage wallet. He transfers his 25 bitcoins from the exchange and also transfers the 75 bitcoins from his original wallet. None of these transactions would cause McGee to recognize gains or losses as a result of the transfer. The only money McGee would be out would be as a result of transaction fees charged for transferring the bitcoins.
As the example above shows, McGee’s bitcoins can move multiple times (theoretically an infinite number of times) without tax ramifications. While McGee would have to pay a transaction fee when moving his bitcoins which would lessen the amount of his bitcoin position, he would be able to add the transaction fee amount to increase his basis. The fact that not every bitcoin transaction that occurs on chain is a taxable event makes analyzing the blockchain through sources such as blockchain.com a fruitless activity when trying to accurately create a tax narrative. When you add in that transactions occurring on the blockchain are subject to myriad taxation laws from all over the world, you are left to wonder how much can be learned from examining the blockchain for tax purposes.
In the example above, when McGee transfers his bitcoins from a private wallet to an exchange, the exchange won’t be privy to the tax information necessary to accurately report McGee’s taxes. This is one of the reasons taxation of crypto is so complex and is the reason users purchasing and moving crypto need to store meticulous records. Crypto users can only rely on their own records to accurately report taxes to the IRS particularly if a crypto user has moved his/her crypto position. If you have any questions regarding the topics discussed in this article, please contact us.
