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Is a Coin Swap a taxable event? A CPA explains

Yuuma Nakamura by Yuuma Nakamura
May 19, 2022
in Opinion
0

Home » Is a Coin Swap a taxable event? A CPA explains

Opinion by Tony Dhanjal, the head of tax at Koinly

Crypto is a hot space, and we know this because tax authorities around the world are paying attention. In the US, the IRS is tracking crypto investors who are registered with local exchanges. In Australia, crypto has been on the ATO’s top priority list for 3 tax seasons in a row. It’s a similar story with many other countries. One thing is for certain! It pays to know the tax law. 

Is a coin swap a taxable event? 

In most countries, the answer is yes.

Because most countries view cryptocurrency as an asset rather than a currency, whenever you swap one token for another, or use one coin to buy another, this is seen by the tax authority as selling your original asset and buying another. 

Here is an example! 

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Let’s say I have 5 ETH. I bought them 2 years ago and have been HODLing. According to this ethereum profit calculator, I would be eligible for a CGT discount and would have an after tax gain of about $7,000 waiting for me when I disposed of the asset. 

Now say I wanted to swap some ETH for SOL. When I make that transaction, I will have to pay tax on however much ETH I used to buy SOL. 

What about if I saw a bored apes NFT sale and wanted to buy that using ETH? Would that be a taxable event? Yes. The tax treatment is the same, because crypto is viewed as an asset, not currency, and using an asset to buy another asset is viewed as a liquidation event. 

You might think that you are exempt from taxation when you are buying a stable coin that is pegged to the US dollar. Again, you would be wrong. Even though stablecoins are pegged to the price of a currency, they are still viewed as assets. Buying a stablecoin with cryptocurrency is a taxable event, and selling stablecoins for fiat is also a taxable event. 

So how can you reduce your tax on coin swaps? 

  1. HODL!

If you perform a coin swap using a cryptocurrency that you have held for more than 12 months, you will most likely be eligible for a capital gains tax discount. This will significantly reduce your tax burden. 

  1. Use fiat to buy and transact

From a tax perspective it is far more advantageous to buy assets and transact with fiat than it is with cryptocurrency. This is one area that is still developing, so be sure to stay up to date with the relevant authority. 

Keeping cryptocurrency as an investment product and transacting with fiat will reduce your tax burden. 

  1. Keep track of your portfolio 

You don’t want to be giving up your gains to the tax man because you didn’t adhere to the rules. There is long term value in staying on top of your crypto portfolio, and there are a number of software tools that can help you with this. 

Keeping track of your portfolio will help you offset gains with losses so that you pay the right amount of tax, which is often less than people think.

  1. Know the tax law!

It pays to know the tax law! Some people might even say it is fun. Luckily, you can find crypto tax guides for most countries in the world over at Koinly. Most tax agencies also have a newsletter which you can subscribe to so that you stay abreast of the latest tax developments. Either way, if you know the parameters, you reduce your risk, and all good investors know that lower risk results in a greater long term result.

Happy investing! 


Tony Dhanjal, the head of tax at Koinly, is a recognised crypto tax subject matter expert and a thought leader in this space. He is a qualified accountant with over 20 years of experience spanning across industry within blue chip organizations, investment banking and public practice.

Yuuma Nakamura

Yuuma Nakamura

Yuuma Nakamura is a staff writer covering crypto, blockchain, finance and other technology for FintechZoom. Contact: [email protected]

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