The Tax Implications of Buying and Selling Cryptocurrency That Most Ignore

Key Points

• Some investors think they only need to pay taxes when converting crypto to cash.

• However, every single transaction is actually a taxable event.

Most crypto investors realize that converting a token to cash will trigger capital gains taxes on the trade. However, many investors overlook another major issue: every single sale, swap, or use of a cryptocurrency — not just a conversion to U.S. dollars — is a separate taxable event.

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What does that mean for crypto investors?

If you own Bitcoin (CRYPTO: BTC) and swap it to Ethereum (CRYPTO: ETH), you’ll need to pay taxes on the profit you earned from the Bitcoin sale — even if it was never converted to cash. Stablecoins like Tether (CRYPTO: USDT) and USD Coin (CRYPTO: USDC) might feel like cash because they’re pegged to the U.S. dollar, but those trades are also taxable events.

If you use a cryptocurrency to buy something, you still need to pay a capital gains tax based on its original acquisition price before it was handed over. For example, if you bought 0.1 Bitcoin for $3,000, its value appreciated to $7,400, and you used it to buy a new PC, you’d still need to pay a capital gains tax on the $4,400 gain even though you never converted your Bitcoin to cash.

In other words, trading crypto too frequently can create some big headaches when you need to file your taxes. Like stocks, cryptocurrencies are subject to short- and long-term capital gains rates — so any tokens sold in less than a year will be taxed at even higher rates.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.