What Are Crypto Wallets?
A crypto wallet is a tool that stores the keys needed to access and control your digital assets. Wallets come in two broad types: self-custody and custodial. Self-custody wallets, like hardware wallets or software wallets you control, give you direct ownership of your private keys. Custodial wallets are managed by third-party services, such as exchanges, where they hold your keys and assets on your behalf.
Self-Custody Wallets
Self-custody wallets include hardware wallets (like Ledger or Trezor), software wallets (like MetaMask), and paper wallets. They give you full control over your private keys, meaning you decide when and how to move your assets. This control offers privacy benefits but also carries risks. If you lose your keys or device, your assets can become irrecoverable. Security depends entirely on your practices—poor key management can lead to theft or loss.
Custodial Wallets
Custodial wallets are provided by exchanges or custodians, like Coinbase or Binance. They store your keys and assets for you, simplifying access and management. However, this means you don't own the keys—your assets are effectively on deposit with the platform. While convenient, custodial wallets are vulnerable to exchange hacks, shutdowns, or regulatory freezes. You rely on the custodian's security and trustworthiness.
Risks of Self-Custody
Managing your own keys means you're responsible for security. Risks include losing access if you forget your seed phrase, theft from hacking, or physical damage to hardware wallets. There's no insurance if you lose your keys, and scams targeting private key recovery can happen. Proper backup and security practices are essential to mitigate these dangers.
Tax Reporting by Wallet Type
The IRS treats your crypto transactions as taxable events, regardless of wallet type. When you use a self-custody wallet, each transfer, sale, or swap is traceable in your records. You must report capital gains or losses based on your cost basis and the proceeds from sales.
With custodial wallets, your exchange provides transaction histories, making reporting easier. However, if you transfer assets between your self-custody and custodial wallets, you must record the transfer accurately to avoid misreporting. The IRS hasn't issued specific rules distinguishing wallet types, so proper recordkeeping is your best defense.
Common Wallet & Tax Mistakes
❌ Failing to track wallet transfers
Why
Transferring assets between wallets is not a taxable event, but failing to record it can lead to incorrect gains or losses.
Fix
Maintain detailed records of all transfers, including wallet addresses and dates.
⚠️ Cost
Potential misreporting and IRS audits
❌ Not reporting custodial wallet transactions
Why
Relying solely on exchange statements ignores off-exchange activity.
Fix
Combine wallet records with exchange reports for complete reporting.
⚠️ Cost
Underreporting income or gains
❌ Ignoring security risks of self-custody
Why
Poor key management can lead to loss or theft.
Fix
Use hardware wallets, strong passwords, and secure backups.
⚠️ Cost
Loss of assets or theft
How Moonscape Handles Wallets & Taxation
Moonscape automatically detects transactions across your wallets, whether self-custody or custodial. It consolidates your activity, tracks transfers, and calculates gains or losses accurately. Our platform flags any transfers between wallet types to ensure proper reporting. You can review your entire crypto history in one place, with clear tax implications for each transaction.