Why is a Crypto to Crypto trade a taxable event?
Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain.
IRS Notice 2014-21 describes how existing general tax principles apply to transactions using virtual currency, also known as digital currency. This notice is for use by taxpayers and their preparers.
In this Notice, the IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property. This means that a crypto-to-crypto trade is a disposition of assets and will likely result in a capital gain or loss. That capital gain or loss is equal to the difference between your cost basis—or original purchase price—in the original asset and the fair market value of the asset being acquired.
In general, your crypto activities will constitute a taxable event if you dispose of your crypto. Check out our Tax Rates article for more specific information on the capital gains tax rates.
Some common taxable events according to the IRS:
• Trading one crypto for another crypto.
• Selling crypto for fiat currency.
• Spending crypto on goods or services.
• Earning crypto income.
The following are not taxable events according to the IRS:
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Buying cryptocurrency with fiat money and “HOLDing“.
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Donating cryptocurrency to a tax-exempt non-profit or charity.
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Making a gift of cryptocurrency to a third party within IRS allowable limits. Crypto gifts are generally tax free for the giver and the recipient but can have tax implication when sold or disposed of in the future. For 2024, if the crypto gift exceeds $18,000 ($19,000 in 2025) you must file a gift tax return (Form 709).
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Transferring cryptocurrency between wallets and exchanges (“self-transfer”).
Link to IRS Notice 2014-21
Link to IRS reminder to pay taxes on crypto capital gains (IR-2018-71, March 23, 2018)