A transfer of a cryptocurrency token from one wallet to another, or from a wallet to an exchange (or vice versa) is not a taxable event.
Before and after a transfer, the cryptocurrency token is owned (and controlled) by the same person. The owner has control of the public and private keys of a cryptocurrency wallet and/or control of the tokens once deposited on an exchange.
A taxable event is when the token is disposed – when ownership of the token ceases. A disposal can occur when the token is sold to fiat current (sold to cryptocurrency retailers such as Easy Crypto or BitPrime for $NZD), or, when a token is traded for another token (on an exchange).
We have previously discussed the tax treatment and calculation methods for trading and selling tokens in this article.
Practical applications and examples
John is in the business of cryptocurrency trading. For tax purposes, his cryptocurrency is classified as trading stock. He transfers a cryptocurrency token from Binance exchange to Bittrex so that he can make a future trade on the Bittrex exchange for a different token.
The transfer of the token from Binance to Bittrex is not a taxable event. John still owns the same token; it has been moved (digitally) from one location to another.
This is no different from James who owns two retail shoe stores located in Auckland and Hamilton. James transfers (couriers) 10 pairs of shoes from his Auckland store to the Hamilton store so that he can make future sales of the shoes from the Hamilton store. Before and after the transfer, James still owns and has control of the shoes and has not made a sale to a customer
A taxable event will occur when the token is traded for another token on the Bittrex exchange (or the future sale of the shoes to the customer from the Hamilton store).
Withdrawals and deposits recorded in cryptocurrency tax software
Cryptocurrency tax software (such as Koinly, Coin Tracker, or Coin Tracking etc) may capture a token withdraw or deposit incorrectly as a purchase or sale. As emphasized above, a withdraw from one exchange and a deposit to another is not a taxable event.
If you use these cryptocurrency tracking software (they can provide great record keeping systems and streamline processes), please be careful of how deposits and withdrawals are captured and reported.
Fees incurred when transferring cryptocurrency
Transferring cryptocurrency from a wallet to another, or deposit or withdrawals to/from exchanges often have fees associated with the transaction. These fees are generally tax deductible for cryptocurrency traders and investors. This is because they are incurred as part of carrying on a business or incurred to earn future income (like how a bank may charge bank fees for transferring money between bank accounts). We recommend keeping records of all trading transactions and transfers between exchanges/wallets. See our article, keeping cryptocurrency tax records for more information.
Contact Tim Doyle (firstname.lastname@example.org) for a no obligation call or meeting to discuss any cryptocurrency tax or accounting questions. Our office is in Cambridge, Waikato, or we can arrange a video conference call.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.