Yes, converting one cryptocurrency (crypto) to another is generally viewed as taxable event. This is because the act of converting one currency to another may result in a capital gain or loss. When you convert one currency to another, you are effectively selling the first currency and buying the second currency. As such, any gains or losses from the transaction will be subject to capital gains tax. This situation is complicated though, and your tax burden can be effectively minimized with proper cryptocurrency tax and accounting software, like Ledgible.
Let's take a closer look at different types of taxable and non-taxable events in crypto and figure out if converting cryptocurrency is taxable.
Taxable events in Crypto
Crypto to Crypto
Converting one crypto to another is a taxable event, which is clearly outlined in the IRS's latest guidance on the matter. According to the IRS, this transaction is basically you selling the first currency to then buy another. While this isn't technically what's happening in the crypto ecosystem, this is how the IRS views it. This means that you'll end up having to pay capital gains or losses on the first cryptocurrency you exchanged for this event, not the one you exchanged it for.
Crypto to Fiat
Anytime you sell crypto for fiat (or another crypto for that matter), the IRS considers this a taxable event. You'll want to make sure you properly understand your cost-basis so you pay an accurate amount of taxes in this scenario.
Nontaxable Events in Crypto
Fiat to Crypto
When you buy cryptocurrency with fiat, or cash, this isn't taxable (yet). This event will establish your cost basis and when you eventually trade or sell that crypto you bought, you will pay taxes after that transaction.
Transferring crypto to wallet or exchange
Transferring crypto to a wallet or exchange does not count as a taxable event! However, some exchanges will mistakenly classify these events as taxable when they generate your 1099 forms. This is why it's important to have accurate historical crypto tax tracking software, like Ledgible.
What is the tax rate for cryptocurrency in the US?
The US Tax Code classifies cryptocurrencies as property, not currency. If you purchase cryptocurrency, you need to keep track of the date of acquisition and the cost basis. At the end of the year, you will be required to calculate your gain or loss for each coin on hand and then report it on your tax return.
This complex calculation is what makes crypto tax tools like Ledgible so valuable to traders and CPAs. Ledgible automatically calculates capital gains on all of your transactions and ensures you only pay what you have to.
There are many ways to reduce the amount of cryptocurrency taxes you owe. While a general rule of thumb is booking your losing trades on your taxes to minimize your tax bill, there's easier ways to manage this than just keeping the math in your head. Ledgible Crypto Tax has current year planning baked into their application with no cost, so you can monitor your trades throughout the year and see how they'll potentially impact your tax bill, all without having to bust out the calculator.