Just because crypto is an emerging asset class that doesn’t mean it’s not taxable. Yet with the US tax code reading thousands of pages long, knowing what tax to pay and when can be complicated. Like stocks and bonds, you can buy, sell and exchange crypto. Plus, you can also use crypto as currency to pay for goods and services. Whether you are swapping crypto as a trader or spending it, you might wonder is swapping crypto taxable?
What is a Crypto Swap?
The exchange of one cryptocurrency for another is known as a crypto swap. A swap is like selling your crypto for cash and then purchasing another crypto. Crypto swapping is usually conducted on exchanges or via a brokerage.
Tax Implications of Exchanging One Crypto for Another
The IRS treats crypto assets like property, not currency. Similar to stocks, when you exchange one crypto asset for another, it is a taxable transaction. Whether you realize a gain or loss in a cryptocurrency trade, you must report it on your tax return.
The amount of tax owed depends on how long you owned the asset and how much profit you took. If you own crypto for a year or more, you’ll owe long-term capital gains tax when you swap it. You will pay short-term capital gains tax rates on exchanges of crypto assets you have owned for less than a year. You pay higher tax rates on short-term capital gains because they follow the same rate as ordinary income.
Example of Capital Gain on Crypto Swaps
Suppose you first bought $1,000 worth of Bitcoin. Over time, the value of your investment rises to $1,500. Down the road, you may swap your $1,500 Bitcoin investment for an equivalent amount of Ethereum. Even though this appears to be a simple portfolio adjustment, you essentially sold your Bitcoin for $1,500 and purchased Ethereum for $1,500. Since you initially paid $1,000 for Bitcoin, the $500 profit you made is a capital gain that's subject to tax.
Taxable Crypto as Capital Gains
The IRS treats crypto transactions like stocks and bonds for tax purposes. But with the versatility of cryptocurrency, investors may wonder whether they have a taxable transaction.
Selling Your Crypto for Cash
Any profit you make when selling your crypto for cash is a capital gain and is taxable. Your profit is the difference between what you originally paid for the crypto asset and what you sold it for.
Converting One Crypto to Another
If you profit from trading one crypto for another, as covered in the Bitcoin to Ethereum example above, this represents a capital gain and so is taxable.
Spending Crypto on Goods and Services
You pay taxes on crypto when you use it. According to the IRS, if you exchange virtual currency for goods and services, you likely have a taxable event. By using crypto to pay for goods and services, you may trigger a capital gain or loss.
Nontaxable Crypto Events
Simply entering into a cryptocurrency transaction does not necessarily mean you will be subject to capital gains tax. Nontaxable crypto events can include transferring crypto between wallets or donating cryptocurrency to a tax-exempt non-profit or charity
Buying and Holding Crypto
Buying crypto (going from fiat / US Dollars to crypto) and holding it as an investment does not result in a taxable event. Instead, you only pay capital gains tax on your profit when swapping or selling a crypto asset.
Crypto Gifts
The individual who gifts crypto assets is typically responsible for paying any taxes due. Crypto gifts are subject to both an annual gift tax exclusion and a lifetime basic exclusion. In 2022, you can gift up to $16,000 per person without paying capital gains taxes. Any amounts over this exclusion are reported on your tax return and applied against the lifetime basic exclusion amount. Because this lifetime exclusion from tax exceeds $12 million in 2022, there’s a good chance you won’t owe additional taxes.
Transferring Crypto to Yourself
Transferring crypto between wallets or accounts you own does not trigger a taxable event. The original acquisition date and purchase price carry over when you move crypto assets.
Donating Crypto to a Qualified Tax-Exempt Charity or Nonprofit
Crypto is considered to be property in the eyes of the IRS. No sale has occurred when you donate crypto directly to a qualified nonprofit organization. Even if your crypto assets have appreciated in value, you avoid paying capital gains tax as you won’t benefit from the realized gains
If you itemize your deductions on your tax return, you may be able to claim a deduction for the amount you donated. How much you can deduct depends on how long you have held the crypto, and its fair market value.
Consider Tax Implications Before Swapping Crypto
Cryptocurrency is an emerging asset class that continues to attract investors looking for lucrative returns. While crypto transactions have similar tax treatment as stocks and bonds, investors may unknowingly trigger a taxable event because the currency is so versatile. It’s a good idea to consult your tax accountant if you plan to sell, swap or spend crypto assets as tax laws can be confusing and vary based on jurisdiction.
The responsibility to report and pay taxes lies with the individual investor. However, professional brokerages can point investors in the right direction to ensure they can avoid any crypto tax issues.
Frequently Asked Questions
Do I pay taxes on crypto If I don't sell?
You only pay taxes if you sell, convert or spend crypto assets.
Does converting crypto count as a capital gain?
Crypto is considered property. You realize a capital gain if you convert crypto at a profit.
How much do you get taxed for converting crypto?
If you convert crypto that you held for longer than one year, you may pay up to 15% in capital gains taxes if you have a profit. When you convert crypto that you have owned for less than one year, your short-term capital gain is taxed at ordinary income rates.
About Anna Yen
Anna Yen, CFA is an expert crypto writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about alternative investment topics ranging from derivatives to cryptocurrencies. Her work has been published on sites like the crypto exchange Bybit. After six years of personal experience investing in crypto, she prefers BTC, ETH, and SOL.