Crypto Tax Prep: What Are the Tax Implications of Gifting Digital Assets?
Gifting cryptocurrency could be a way to offset some of the capital gains you’ve accumulated throughout the year.
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If you send cryptocurrency to family, friends, or a crowdsource campaign for someone with medical bills, it’s considered a gift.
Gifting digital assets could be a way to offset some of the capital gains you’ve accumulated throughout the year, and potentially allow you to save some money on taxes.
In our article, we outline details for various gifting scenarios including potential tax benefits for the gift recipient.
If you’d like to donate your cryptocurrency to a qualified charitable organization instead, please learn more about the tax implications of donations here.
Is gifting cryptocurrency a taxable event?
No, gifting cryptocurrency isn’t a taxable event because you don’t recognize income, gains, or losses when it’s gifted.
How do you gift cryptocurrency?
Gifts, unlike donations, can be sent to anyone. Whether it’s a birthday present, crowd-funding contribution, or an early inheritance, crypto sent to someone other than a qualified charitable organization falls under the gift category.
What are the tax obligations for a gift giver?
The entire gift is tax-free to you, and it will be as if you never purchased or disposed of the asset.
For example, if you bought .5 BTC for $2,500 on October 15, 2017, then sold it on February 11, 2020, when it was worth $5,000, you’d have to pay tax on your $2,500 in capital gains.
But if you gift the .5 BTC to your friend instead, your generosity is rewarded with tax savings. You, as the giver, don’t owe tax on the capital gains.
What are the tax benefits for the gift receiver?
There are also potential benefits for the receiver of the gift if the steps below are followed:
The gift giver needs to provide the gift recipient with the asset acquisition information.
Then, the gift recipient can adopt the gift giver’s holding period and potentially their cost basis as well.
What is the tax advantage of adopting a giver’s holding period?
If the recipient knows the acquisition date of the gift, the IRS allows the recipient to adopt its holding period.
Adopting a longer holding period is tax beneficial because the receipt becomes eligible for long-term capital gains rates if they hold the gift for over a year.
What is the advantage of adopting a giver’s cost basis?
If the recipient knows how much was originally paid for the gifted cyrpto, they may be able to adopt that cost basis. Cost-basis adoption is dependent on whether a gain or loss occurs when the gift is converted to fiat or another cryptocurrency.
Specifically, the IRS states:
“For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero.”
There are three outcomes that can occur when receiving a gift:
Proceeds exceed the giver’s cost basis
Proceeds are less than the giver’s basis and the fair market value at the time of the gift—this lowers the receiver’s cost basis in the asset
Proceeds are less than the giver’s cost basis and more than fair market value at the time of gift—this allows the recipient to avoid tax implications on the gift
Example 1: Proceeds exceed the giver’s cost basis
Imagine you’re gifted .5 bitcoin (BTC). The fair market value at the time of your gift was $2,000, but the giver’s cost basis was $2,500.
The price of BTC goes up, and you decide to sell it for $5,500.
Since you’re in a gain position when the .5 BTC is sold, you can adopt the giver’s cost basis and recognize long-term capital gains of $3,000.
The fair market value at the time of the transaction is inconsequential because the giver’s cost basis is lower than the sale proceeds.
Example 2: Proceeds are less than the giver’s basis and the fair market value
In this scenario, you’re given .5 BTC; the fair market value at the time of the gift is $2,000, and the giver’s cost basis is $2,500.
The price of BTC drops and before it goes any lower, you decide to sell your .5 BTC for $1,500.
Since you’re in a loss position, the basis is limited between the giver’s cost basis or the fair market value at the time of the gift—whichever one is the lesser amount.
In this circumstance, you must take the $2,000 fair market value as your basis, and recognize a long-term capital loss of $500.
Example 3: Proceeds are less than the giver’s cost basis and more than fair market value
Similar to the scenarios above, you’re given .5 BTC; the fair market value at the time of the gift is $2,000, and the giver’s cost basis is $2,500.
This time around, you sell the BTC for $2,400—still less than the giver’s cost basis, but more than the fair market value.
In IRS Publication 551, Basis of Assets, it states:
“If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the fair market value for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.”
In these circumstances, you have neither a gain nor a loss on the sale; adopting the giver’s cost basis would result in a loss, and using the fair market value to establish cost basis would result in a gain.
Next steps
Gifting cryptocurrency could be a way to offset the capital gains you’ve accumulated throughout the current year. As you’re preparing to file at year-end, it’s a strategy you’ll want to give some careful consideration.
To learn more tax strategies, and more details about how cryptocurrency is taxed, please see our resources:
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