I am not a lawyer or a tax advisor and the following is based on what I've read. Talk to your own tax advisor for guidance specific to your situation.
Ok, in the United States the sale of Bitcoin is a taxable event. If you sell for a gain you are required to pay taxes on that gain. If you sell for a loss you can apply that loss to offset other gains. I'm not going to get into any other specifics here regarding rates, capital gains or how to do your taxes. The main questions are (1) what is a sale and (2) what Bitcoin am I selling (for tax purposes) when I sell.
As to the first question, basically anytime you own Bitcoin and then, after some transaction, you don't own Bitcoin that is a sale. This includes:
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Sale of Bitcoin for fiat currency on an exchange (e.g. Coinbase) or off an exchange (e.g. to your friend). There is no difference from a tax perspective based on where you are selling or to whom you are selling.
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Exchanging Bitcoin for other crypto currency. If you directly trade Bitcoin for Ethereum, for example, without holding any fiat in between that is still a taxable event. This gets complicated since you are dealing with two crypto currencies yet your taxes are paid in USD. It is important to keep track of the value of both cryptos (in USD) when making such a transaction in order to determine your gains/losses on Bitcoin and your cost basis for Ethereum. Unless you have some specific reason to go directly between cryptos it may be easier to always go to USD first for record-keeping purposes.
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Exchanging Bitcoin for anything else, such as a car. This is still taxable event though you never actually "sold" the Bitcoin for fiat first. If you bought one Bitcoin for $10,000 and then exchanged that Bitcoin for a car selling for $19,000 the $9,000 difference is taxable.
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All other Bitcoin "costs" as a result of a "sale" to the extent paid in Bitcoin, including all transaction and network fees. This can get very complicated as well.
When you sell Bitcoin, what Bitcoin are you selling? It's basically "first in, first out" or "FIFO" for short. If you bought one Bitcoin per month for six months starting in January (so January through June) and you sold a Bitcoin in July, you would be selling the January Bitcoin. Your taxable amount, therefore, would be your sale price in July minus your purchase price for your January Bitcoin.
Putting all of that together, imagine the following scenario of a Bitcoin buyer. This buyer purchased the following:
- January 2020 - .05 BTC
- February 2020 - .039501 BTC
Let's say (for convenience) that Bitcoin was $10K in January and you bought .05 Bitcoin from an exchange. You would expect this to cost $500, but there is a transaction fee as well (let's say $4.99) so your total cost was $504.99. This is your cost basis for your January Bitcoin and implies a per Bitcoin cost of $10,099.80 ($504.99/.05).
In February (still assuming $10K per Bitcoin plus $4.99 transaction fee) you only had $400 USD in your exchange account and wanted to buy the most Bitcoin you could at the market cost. So you paid $4.99 to the exchange and bought $395.01 of Bitcoin, or .039501 Bitcoin. However, your cost basis isn't $395.01, but rather $400, which is your total cost of acquisition. The implied cost per Bitcoin would be $10,125.57 ($400/.039501).
In March you want to do two things - sell .052 Bitcoin and transfer your remaining Bitcoin to a hardware wallet.
For the sale you will be applying the FIFO method to determine taxes. So of the .052 Bitcoin you are selling .05 will come from your January purchase and .002 will come from your February purchase. Let's assume Bitcoin is $12K at this point and that it will cost $4.99 to sell. Your total proceeds would be $12K * .052 - $4.99, or $619.01 and the actual Bitcoin price you are selling at would be $11,904.04 ($619.01/.052). Now on to the FIFO determinations...
Your "first in" was January so it will be your "first out"...
- January Bought: .05 BTC @ $10,099.80 = $504.99 (cost basis)
- January Sold: .05 BTC @ $11,904.04 = $595.20 (sale price)
And your next "out" will be a portion of February...
- February Bought: .039501 BTC @ $10,125.57 = $400 (cost basis)
- February Sold: .002 BTC @ $11,904.04 = $23.81 (sale price)
But you actually need to divide February up between the sold portion and the unsold portion...
- Portion of February Bought and UNSOLD: .037501 BTC @ $10,125.57 = $379.72 (cost basis)
- Portion of February Bought and SOLD: .002 @ $10,125.57 = $20.26 (cost basis)
- February Sold: .002 BTC @ $11,904.04 = $23.81 (sale price)
Now, to determine your taxable gains:
- January: $595.20 - $504.99 = $90.21
- February: $23.81 - $20.26 = $3.55
For a total of $93.76.
And you still have .037501 BTC remaining which you want to transfer to your hardware wallet. There are two costs associated with this (in this example) - exchange fee of $2.99 (which will be payable in your Bitcoin) and a network fee of .00005 BTC. The current cost of Bitcoin is still $12K. Here's what is happening:
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Your .037501 will be reduced by .00005 BTC (network fee) and .000249 (exchange fee...$2.99/$12K).
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Your hardware wallet will receive .037501 - .00005 - .000249 = .037202 BTC (Note: if you had other Bitcoin still in your account these fees may be taken out of that amount rather than the sent amount)
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And you "sold" .00005 + .000249 = .000299 BTC
Thus you just had another sale event whereby you sold .000299 BTC (from your February purchase) at $12K. Looking at the FIFO....
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Portion of February Bought and SENT TO HW WALLET: .037202 BTC @ $10,125.57 = $376.69 (cost basis)
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Portion of February Bought and USED TO PAY FEES: .000299 @ $10,125.57 = $3.03 (cost basis)
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February Sold: .000299 BTC @ $12,000 = $3.59 (sale price)
So your taxable gain would be $3.59 - $3.03 = $0.56 (which will be rounded up to $1 on your taxes).
And this is why you should keep good records.
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