Do You Have to Pay Crypto Taxes If You Reinvest?
Reinvesting crypto profits into more digital assets may seem like a smart strategy to maximize returns, but it doesn’t exempt you from taxes. Many traders and businesses assume that as long as they don’t convert crypto to fiat, no taxable event occurs. Unfortunately, that’s not how the IRS or other tax authorities currently see it. In this guide, we’ll break down the tax implications of reinvesting crypto gains, how to report these transactions, and how Integral’s crypto accounting solutions help businesses streamline tax compliance.
Reinvesting Crypto: Does It Trigger a Taxable Event?
The short answer: Yes, reinvesting crypto usually triggers a taxable event.
From a tax perspective, trading or reinvesting cryptocurrency—whether swapping one digital asset for another, purchasing an NFT, or reinvesting staking rewards—is treated as a disposal of the original crypto. The IRS and most global tax authorities classify this as a sale, making it subject to capital gains tax.
Think of it like stocks: selling shares of Apple to buy Tesla doesn’t avoid capital gains tax. Similarly, if you sell Bitcoin (BTC) to reinvest in Ethereum (ETH), you must report the capital gain or loss from the BTC sale.
Even if you immediately use the proceeds to buy another asset, the IRS still considers it a taxable event. That means timing, cost basis, and accurate transaction tracking are crucial to minimize tax liabilities.
Tax Tip: Before 2018, some crypto investors tried to claim 1031 like-kind exchanges to defer taxes on crypto-to-crypto swaps. However, under the Tax Cuts and Jobs Act of 2017, 1031 exchanges no longer apply to crypto. Any swap from one digital asset to another is typically a taxable event in the U.S.
How to Calculate Taxes on Crypto Reinvestment
To determine your tax liability when reinvesting, you need to calculate capital gains or losses for each transaction. The formula is simple:
Capital Gain/Loss=Proceeds−Cost Basis\text{Capital Gain/Loss} = \text{Proceeds} - \text{Cost Basis}
Cost Basis: The original purchase price of the asset, plus any transaction fees.
Proceeds: The fair market value (FMV) of the asset at the time of the reinvestment.
Capital Gain: If proceeds exceed the cost basis, the difference is taxable income.
Capital Loss: If proceeds are lower than the cost basis, it can be used to offset gains and reduce taxes.
Example:
You bought 1 BTC for $20,000 six months ago.
BTC is now worth $40,000, and you swap it for ETH.
The taxable capital gain is $20,000 ($40,000 - $20,000).
If you held BTC for less than a year, the gain is short-term and taxed at ordinary income tax rates (up to 37% federally in the U.S.). If you held it over a year, it qualifies for long-term capital gains tax rates (0%, 15%, or 20%).
Important: Depending on your income level, Net Investment Income Tax (NIIT) of 3.8% may also apply to your crypto capital gains. Additionally, state and local taxes can further affect your total tax rate.
Common Crypto Reinvestment Scenarios & Tax Implications
1. Swapping One Crypto for Another
Exchanging one cryptocurrency for another (e.g., BTC for ETH) is a taxable event. The IRS treats it as selling one asset and using the proceeds to buy another.
📌 Tax Tip: Use HIFO (Highest In, First Out) or Specific Identification accounting methods to minimize taxable gains by strategically selling higher-cost assets first.
2. Buying NFTs with Crypto
Purchasing an NFT with crypto is also a disposal of that cryptocurrency. The gain or loss is based on the difference between your crypto’s purchase price and its FMV at the time of the NFT purchase.
3. Reinvesting Staking Rewards
Staking rewards in the U.S. are generally taxed twice under current IRS guidance:
At receipt: Most taxpayers report staking rewards as ordinary income based on their FMV when received.
At disposal: If you later sell or reinvest staking rewards, you may owe capital gains tax on any appreciation since you first received them.
Note: The taxation of staking rewards remains an area with some legal uncertainty (e.g., Jarrett v. United States). However, until formal guidance changes, reporting staking rewards as income upon receipt is generally the safest approach.
4. Trading Crypto for Stablecoins
Even swapping into stablecoins (e.g., USDT, USDC) is a taxable event. The original asset is considered sold, and any gains must be reported.
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How to Report Crypto Reinvestment on Taxes
To stay compliant, businesses and traders must accurately report all taxable crypto transactions. The key forms include:
For U.S. Tax Filers:
Form 8949: Reports crypto sales, swaps, and reinvestments, detailing acquisition date, disposal date, cost basis, proceeds, and capital gain/loss.
Schedule D (Form 1040): Summarizes total capital gains and losses from all sources, including crypto transactions.
Schedule C (for businesses): If crypto is part of a business operation, transactions may need to be reported on Schedule C.
Don’t forget: Some filers may owe the 3.8% NIIT if their modified adjusted gross income (MAGI) exceeds the threshold (e.g., $200,000 for single filers and $250,000 for married filing jointly).
For International Tax Filers:
UK (HMRC): Crypto reinvestments are subject to Capital Gains Tax (CGT) and require Form SA108.
Canada (CRA): Crypto trades are taxed as capital gains or business income, depending on trading frequency.
EU (varies by country): Some EU countries tax crypto-to-crypto swaps, while others only tax upon conversion to fiat.
💡 Integral makes it easy to track all these transactions with automated tax reports that integrate directly into your accounting software.
Final Thoughts
Reinvesting crypto may help grow your portfolio, but it doesn’t eliminate tax obligations. Whether you swap assets, buy NFTs, or reinvest staking rewards, these transactions are taxable in most jurisdictions.
The key to minimizing crypto tax headaches is accurate tracking and proper accounting—which is exactly where Integral can help. With automated reconciliation, tax reports, and ERP integrations, Integral ensures your business stays compliant with crypto tax laws.
