By default, the transfers to and from your wallet/exchange are taxable.
However, this does not apply if you transfer coins/currencies from one wallet/exchange that you own to another wallet/exchange you own. This is because the asset never left your possession and therefore shouldn’t be taxable. We call this kind of transaction an internal transaction.
In this article, we will go over how to classify these transactions and how to troubleshoot any potential problems while doing so.
Automatically Classifying Your Internal Transactions
With enough data, we can classify the internal transactions for you. So if your wallets/exchanges provide the data we need, then we’ll do it for you.
However, there are some cases where the data that we receive in the transaction is not complete. With those transfers, and with other transfers that involve wallets/exchanges that we do not fully support, you’ll have to classify them manually. We’ll go over how to do that in the next section.
Using the Review Process to Confirm Internal Transactions
If you have internal transactions have been correctly classified, you can confirm that they are Internal Transactions by going through the Review Process. First press the Review button in the menu on the left, and then click on Step 2: Internals
Once there, if transactions have correctly classified then they will be listed on this page. And you can approve those transactions that have been correctly classified.
If there were no potential matches found, then we would need to fix any problems with the transactions before trying again.
Manually Classifying Your Internal Transactions
Before you can classify your transactions as internal, you must first verify the following.
- They are currently unclassified.
- The timestamps are less than 6 hours apart.
- The transfer amounts aren’t over 18% different.
- They have the same asset type and transaction hash
You may have to manually edit transactions so that they meet these criteria, before they show up in the Review Process. Once fixed, you can go back to Step 2:Internals and Approve those transactions.
Fixing Problems With Differing Transaction Amounts
Below is a basic example you might have which involves transferring 1 BNB into a wallet and only 0.8 BNB being received.
If you were to try turning this transaction into an internal one, it would show no results. This is because the differing amounts are over 18% different. So, fixing this would involve changing the amount deposited into your wallet. We would also need to add the difference as a new transaction classified as “Fee”. Doing so would look like the following.
By making these changes, we can now classify our transaction as internal. Once finished, your transactions should look like the following.
By now, you should have a good understanding of how internal transactions work. You should also know how to classify and fix common problems. Use this classification to let us know that the transfer shouldn’t be taxable. By doing so, you’ll prevent the overpayment of taxes.