In this article, I will tackle the frequently asked question, “Do you pay taxes on crypto before withdrawal?” Most neophytes often wonder when investing in crypto, tax obligations come into play.
I will focus on crypto taxes and the concern about the tax implications, and whether it is the mere holding or withdrawal that warrants taxes or whether it is the mere holding or withdrawal that is taxable or only the dealings.
Introduction
Cryptocurrencies have become part of global finance and captured the interest of a wide array of investors and traders. This brings us to the ever-pressing question, do you have to pay tax on crypto before withdrawing it?
The answer to this question is no—keeping cryptocurrency in your digital wallet is not banked and does not create a tax liability. One is taxed only because a certain tax triggering event occurs.
Such in the case of crypto, events whereby you sell your crypto for cash, exchange crypto for one another, and use it to pay for other goods and services. In other words, tax is not paid on the basis of ownership, but rather on the basis of transactions that employ a gain or loss.
Understanding Taxable Events in Cryptocurrency
In crypto currency, a taxable event is when a crypto transaction results in a profit or a loss. More specifically, when you sell your crypto or when you trade it with other digital assets, you are crypto is always in flux, and when you do that stuff you are trading it for a different value. In such cases, tax obligations arise.
Taxable events include:
- Selling crypto to a fiat currency
- Exchanging one crypto for another
- Paying for goods or services with crypto
- Gaining crypto via mining, staking, or receiving crypto as payment.
As long as you are holding crypto, you have not “realized” any gains or losses, thus, no taxes are owed.
Non-Taxable Events Explainednon taxable Events Overview
Many people worry about taxes when it comes to cryptocurrency, but it’s important to understand that not every crypto transaction results in a tax liability. Certain actions are considered non-taxable, which can help minimize your overall tax burden. Here’s a simple guide to some common non-taxable events and when taxes actually apply:
| Event Type | What It Means | When Taxes Apply |
|---|---|---|
| Holding Cryptocurrency | Keeping crypto in your wallet without selling it does not trigger taxes. | Selling the crypto for a profit. |
| Transfers | Moving crypto between your own wallets or accounts is non-taxable. | If you sell or trade it after the transfer. |
| Gifts | Receiving crypto as a gift is not taxable at the time of receipt. | Selling the gifted crypto. |
| Donations | Donating crypto to qualified charities may qualify for tax deductions. | Selling the donated crypto triggers taxes. |
| Realized Gains or Losses | Taxes are only triggered when a transaction locks in a gain or loss. | Exchanging crypto for goods, services, or other crypto. |
You will be able to navigate these events with tax confidence. For example, if you hold cryptocurrency, you will not face tax payment until you sell or exchange that cryptocurrency. Likewise, transferring between wallets, gifting, and other actions you perform do not incur tax.
Donations do not come with any tax obligations but may provide tax benefits. By being mindful of such events, you will be able to grow your investment more freely without having to worry about sudden tax payments.
Calculating Capital Gains and Losses
Non-Taxable Events Explainednon taxable Events Overview
To discharge your tax liabilities, it may become necessary to calculate and understand the capital gains and losses that come with cryptocurrency deals. Focus on these three areas:
Realized Gains or Losses On Your Investments: Buying, selling, or trading cryptocurrency and gains or losses realized are not the same thing. You do not realize gains or losses when withdrawing cryptocurrency from an exchange account.
Cost Basis versus Sale Price: Capital gains is determined by the selling price of the cryptocurrency, less the cost basis which is the purchase price and any fees that may apply.
Short-Term versus Long-Term: Capital gains on cryptocurrency that is held for under one year is classified as short term and is taxed at the ordinary income rate, while gains on crypto that is held for over one year is classified as long term with reduced tax rates.
Record Keeping of your tax documents is very important. The IRS request that any dates, prices or fees on purchases that are necessary to calculate capital gains or losses should be maintained.
Strategies To Minimize Taxes
Taking smart plans in Crypto taxes, executing some steps with finesse will save you time and money. One option that works for a lot of people is withdrawing funds in years when you earn lower money. Doing this helps with lower income brackets, keeping you in charge with income taxes and capital gains taxes.
Another great option is tax-loss harvesting. Selling coins or tokens that have lost value allow you to use losses against gains, thus lowering your taxable income by a sizable amount. While it is true that taxes still have to be paid, it is easier to bear when lower than \$3,000.
Investors might consider a Crypto IRA. This allows for taxes to be postponed or paid none at all, depending on which account is picked. The investments can also grow in value, adding more to various portfolios.
Purchasing crypto and holding it for more than 12 months also qualifies for the long term capital gains**. The gains can range from 0 to 20%. This is a far better option than the short term gains, which can be in the range of 10 to 37%.
Lastly, cryptocurrency gifting is a good option. In 2024, you can gift as much as \$18,000 without paying taxes. This amount is set to increase in 2025 to \$19,000. Taxes remain the responsibility of the receiver once a decision to sell the gift is made.
FAQ
Is swapping crypto taxable?
Swapping one cryptocurrency for another is taxable, treated as a sale, requiring capital gains reporting based on purchase and swap values.
Do you pay taxes when you transfer crypto?
Transferring crypto between your wallets isn’t taxable unless selling or exchanging occurs during transfer, which triggers capital gains tax obligations.
Do you pay taxes if you lose money on crypto?
Selling crypto at a loss is taxable, but losses can offset gains or reduce income through tax-loss harvesting, lowering liability.
Do you pay taxes if you lose money on crypto?
Selling crypto at a loss is taxable, but losses offset gains or income via tax-loss harvesting, reducing overall tax liability effectively.
