14

Will I get taxed if I do this?

  1. Purchase $1000 USDT on Binance
  2. Transfer to a crypto exchange outside the U.S., or transfer to a wallet address and use decentralized exchange.
  3. Buy bitcoin, earned $1000, sell for $2000.
  4. Transfer $2000 USDT to my wife or father's Coinbase account, cashout.

Will I get taxed? Will my wife/father get taxed?

Also, what's the taxable amount? I believe no one (IRS, Binance, Coinbase) could calculate the real capital gain.

Below are the link to coinbase/binance's tax guide, but not mention this case.

https://www.coinbase.com/learn/tips-and-tutorials/crypto-and-bitcoin-taxes-US https://support.binance.us/hc/en-us/articles/1500004561101-Cryptocurrency-Tax-Reporting

Improve this question
6
  • 12
    Can you clarify what your wife and father have to do with anything?
    – jcm
    Commented Aug 9, 2021 at 9:47
  • 1
    It could be anyone I trust. By sending the fund to a different account, the exchange won't know my cost basis.
    – Eugene
    Commented Aug 9, 2021 at 12:07
  • Ah, right. Missed the part where you send it to them.
    – jcm
    Commented Aug 9, 2021 at 22:00
  • 6
    @Eugene Is the transfer a gift? Or are you expecting to get some personal benefit from the transfer? Are you expecting that your father will somehow give $2,000 to you? The tax treatment for a bona fide gift out of generosity is different from the tax treatment of a transfer made for personal gain or to compensate someone.
    – David Schwartz
    Commented Aug 9, 2021 at 23:05
  • 11
    Ah, so money laundering or tax fraud...
    – kuhl
    Commented Aug 10, 2021 at 20:53

3 Answers 3

Reset to default
54

Yes, you'll be taxed.

If no exchange can calculate your basis, they'll simply report to the IRS that you sold crypto and received $2000. The IRS will assume that your basis was $0 and that the whole $2000 was taxable. When you file taxes, you'll document that your basis was $1000 and that only the $1000 gain was taxable.

Improve this answer
7
  • 16
    Normally, you don’t provide documentation with your tax return. You simply report your own basis, and documentation is only provided if requested in an audit.
    – Ben Miller
    Commented Aug 9, 2021 at 10:57
  • 8
    @BenMiller-RememberMonica - the history of the IRS not requiring documentation aligns with regulation in investment houses. Meaning they know they can get the data from other places... Given that there is not regulation - or regulation that the provides the IRS access I can guess that people with crypto accounts probably will be a target of IRS audits in the near future.
    – blankip
    Commented Aug 9, 2021 at 18:27
  • 2
    @JaredSmith - no not at all. My guess is the IRS will use an algorithm to determine the possible amounts (forecasting) you had invested in crypto. Given the nature of the investment EVERYONE could be leaving off a few zeros... or EVERYONE could declare nothing. I have a feeling the IRS will using user mining/sharing to help catch people. Meaning I wouldn't leave comments on FB about crypto or join crypto groups unless anonymously. Will everyone dealing in crypto be audited? No. If the IRS thinks you dealt in crypto will you have a higher audit chance? Yes.
    – blankip
    Commented Aug 10, 2021 at 16:53
  • 3
    @blankip The scenario was that the exchange will "simply report to the IRS that you sold crypto and received $2000". Without basis information, $2000 is therefore an upper bound on the possible capital gain. So, Jared's point is that the IRS would know in this case that by disputing the self-reported basis, the most an auditor could recover is $2000 * tax bracket. Not very worthwhile. $200,000 * tax bracket, on the other hand... That's what I understood by "not going to chase the OP unless they left a couple zeros off the amounts in the question".
    – nanoman
    Commented Aug 11, 2021 at 2:38
  • 2
    Also, if you've received an offer via email to provide this service and keep X% as profit for yourself, it is a scam and you're either laundering money for criminals or going to wind up on the hook when the fraud investigation comes calling. Don't do it.
    – Shadur-don't-feed-the-AI
    Commented Aug 11, 2021 at 8:32
51

The first important principle to remember when it comes to taxes is this: Taxable events are taxable whether or not anything is reported to the IRS by someone else. You are legally required to report and pay tax on your taxable activities, even if the IRS doesn’t yet know about them. Taxes are sort of on the “honor system,” until you get audited.

So let’s look at each of your listed activities to see which ones are taxable. Please note that your activity #3 is really two activities, and I have split them apart below.

  1. Purchase $1000 USDT on Binance

The initial purchase of a cryptocurrency is not taxable.

  1. Transfer to a crypto exchange outside the U.S., or transfer to a wallet address and use decentralized exchange.

This is not taxable, either. However, remember that while moving it outside the U.S. may avoid your transactions being reported to the IRS, it will not relieve you of your own reporting and tax obligations.

  1. (a) Buy bitcoin [for $1000 USDT].

Tax wise, when you buy one crypto with another, this is treated as if you had sold the first crypto and bought the second crypto with cash. However, because USDT is tethered to USD, selling the USDT results in no taxable gain. So far, still no taxable events.

  1. (b) Sell [bitcoin] for $2000 [USDT].

Here is where it happens. When you buy USDT with Bitcoin, it is treated as if you had sold the Bitcoin for cash, then purchased USDT. This is taxable. You would need to report and pay tax on a $1000 capital gain.

  1. Transfer $2000 USDT to my wife or father's Coinbase account, cashout.

In the U.S., gifts under $15000 per year are not taxable, and gifts to your wife are never taxable. The recipient of your gift would have a cost basis on his or her crypto holding of $2000, which is what the cost basis was of your USDT holding. No tax for them when they cash out.

Note: If you had given your wife or father your Bitcoin holding instead of first converting to USDT, you would avoid the taxable event in step 3(b). However, in that case, your recipient’s cost basis in the crypto would be only $1000 instead of $2000, and when they cash out, they would have to pay the capital gains tax that you avoided.

Improve this answer
7
  • 2
    Nothing in the question suggested that the transfer was a gift. In the case of a transfer to a spouse, it doesn't matter. But in the context of a transfer to a parent, it does. If the transfer is not in fact a gift (if, for example, there is an expectation that the OP will be compensated in some way), then you have a taxable capital gain from the transfer.
    – David Schwartz
    Commented Aug 9, 2021 at 23:04
  • 2
    @DavidSchwartz Nothing in the question suggests it is not a gift, either. Either way, the capital gain tax will need to be paid by someone; either by the OP or by a gift recipient.
    – Ben Miller
    Commented Aug 10, 2021 at 0:15
  • 2
    @BenMiller-RememberMonica the OP specifies in the comments that this transfer to a spouse and parent is for the sole purpose of obscuring the cost basis and thus tax liability. So it's safe to assume the OP would be getting the money back after the BTC was sold.
    – kuhl
    Commented Aug 11, 2021 at 14:30
  • 2
    @kuhl Whether it is or it isn't, doesn't matter. Either way, capital gains tax will be owed by someone; the transfer to the other person and back does not eliminate the capital gains tax requirement. If the OP's goal is to legally avoid taxes, this doesn't do it. If the OP's goal is to cheat on taxes, my answer doesn't tell you how to best do that.
    – Ben Miller
    Commented Aug 11, 2021 at 14:37
  • 1
    @BenMiller-RememberMonica Oh, I agree and your answer is good. I was just clarifying the point about the gift.
    – kuhl
    Commented Aug 11, 2021 at 14:43
1

There is not really such thing as "be taxed." There are laws that define what taxes you will owe, and it is (roughly) up to you to pay them or not, followed by possible consequences of that choice.

If you earn money in the US, you owe taxes on it depending on your bracket. That's it.

All that part about BitCoin and de-fi doesn't really have anything to do with it.

Or are you asking if this is a good way to avoid paying taxes you owe, without being caught? I certainly wouldn't take this approach.

Improve this answer

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .