In the US, generally, giving and/or receiving cryptocurrency as a gift is a non-taxable event for the recipient and for the donor (unless it meets the threshold for a gift tax). According to the IRS, “a taxable gift is any property transferred for less than adequate and full consideration.” In simple terms, this means a gift is when you give someone something and didn't receive anything in return and/or you received something in return which is less valuable than the property you gifted.
When you gift crypto, you can come across two situations:
Fair market value more than or equal to the donor's adjusted basis at the time of gifting
This is an easy situation to grasp. In this case, the recipient simply takes on donor’s adjusted basis and holding period of the crypto asset being gifted.
Fair market value of donation is less than donor's adjusted basis at the time of gifting
If the fair market value of the cryptocurrency at the time of the gift is less than the donor's adjusted basis, the recipient's basis depends on whether s/he has a gain or a loss when the recipient disposes of that property.
Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Your basis for figuring loss is its fair market value when you received the gift plus or minus any required adjustment to basis while you held the property.
This is very confusing, so here's an example to demonstrate. Let's say that Rashmi buys one bitcoin for $1,000. Two years later she gives it to Jon when the price of bitcoin is $500. Ten days later Jon sells the bitcoin at the following price points:
- $1,100. He takes on Rashmi's original basis of $1,000, and has a long-term capital gain of $100
- $400. Since there is a capital loss using Rashmi's basis, he can't use donor’s original cost basis of $1,000. Instead, he takes on the fair market value at the time of transfer as basis ($500), leaving a long-term capital loss of $100
- $900 (selling price between donor’s cost basis and the fair market value at the time of the gift). Jon will not recognize any capital gains or losses.
This is a counter-intuitive tax scenario, so it may help to think of this treatment as a way to prevent folks from sharing their capital losses with friends. Make sure to keep detailed records any time you send/receive a crypto gift, the donor's original basis, acquisition date (which you always inherit), as well as the fair market value of the coin on the date of the gift
Note: gift and tipping rules vary from country-to-country. If required to report as taxable income, you would simply convert the cryptocurrency to their fair market value at the time they are received.
Per the updated IRS guidance on cryptocurrency taxation, donating cryptocurrency to a charity will not trigger a capital gain or loss. If you are donating a crypto asset which you have held for more than one year, you are eligible for a deduction equal to the fair market value of the asset at the date of the donation. If you have held the asset for one year or less, you are still eligible for a deduction. However, it will be the lesser of the fair market value of the asset at the time of the donation and the cost basis of the asset.
In essence, this means that you may donate appreciated cryptocurrency assets to charities and bypass capital gains taxes.
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Disclaimer: this post is informational only and is not meant as tax advice. For tax advice please speak with a tax professional.