By default, the transfers to and from your wallet/exchange are taxable. This would be wrong if they involve 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.
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.
Once you have verified their eligibility, they are ready for classification. We can do this in one of two ways. You can go to the “Identify Internals” section of the review process. Or you can select the “Internal” classification in the transaction’s settings. Either way will bring you to the same page.
Below is a screenshot of this page with an example transaction ready for classification.
Then all you need to do is select all and approve the changes. If a transaction had multiple matches, select the right one before accepting the changes.
If there were no potential matches found, then we would need to fix any problems with the transactions before trying again.
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.
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