It is vital to identify the correct proceeds in USD for each disposal or exchange, however, it is not always easy to calculate them. Yet before we can discuss this, we will discuss non-taxable events, as these may affect your overall tax liability.
If you donate cryptocurrency directly to a 501(c) charitable organization or an organisation that falls under Section 170(c) then you can avoid capital gains tax and claim a charitable deduction on your tax return of the fair market value at the date of donation.
The amount that can be deducted depends on how long you held the crypto for...
Your charitable deduction is equal to the FMV of the virtual currency at the time of the donation. Your deductible allowance is up to 30% of your Annual Gross Income.
Your charitable deduction is whichever is lowest:
- your basis in the virtual currency or
- the virtual currency’s FMV at the time of the contribution
Your deductible allowance is up to 50% of your Annual Gross Income.
You should get a receipt or written acknowledgement for all donations because the IRS may ask you to provide evidence. Any charitable donations of over $500 should be reported on Form 8283
You can gift up to $15,000 per recipient each year before this becomes a taxable event. This can be gifted all at once or in more than one transaction but must not exceed the threshold.
If the total gifted to one person exceeds $15,000, the giver needs to file a gift tax return - Form 709.
Providing the gift does not exceed $15,000 you do not generate a taxable event until you dispose of the currency, at this point it should be treated as capital gains.
If the fair market value of the gift at the time you received it was equal to or more than the donors adjusted cost basis, then the cost basis for your disposal is the donors cost basis.
If the fair market value of the gift at the time you received it was less than the donors cost basis, then the cost basis for your disposal is:
For a gain – the donor’s cost basis
For a loss – the fair market value at the time you received the gift.
This approach ensures there is no sharing of losses in order to deduct against capital gains.
- Dave bought 10 LTC in 2016 for 200 USD.
- In 2017 Dave gifted it to Ben, when the LTC was worth 500 USD.
- As the gift was less than $15,000 Ben did not need to declare income and Dave did not have to file a gift tax return.
- Ben sells the crypto for $500.
- As the FMV was equal, to calculate his capital gains he takes on Dave’s cost basis of 200 USD to calculate his capital gains: 500 (sell price) - 200 (cost basis) = 300 USD (gain)
- Sam bought 100 BTC in 2014 for 10,000 USD.
- She gifted it to George in 2016, when the BTC was worth 8,000 USD.
- Because this was less than the gifting threshold he did not need to declare income and Sam did not have to file a gift tax return.
- George thought about selling the crypto in 2017 for 7,000 USD
- As this was a loss, his cost basis would have been the FMV when he received the gift - 8,000 USD:
- Capital loss = 7,000 (sell price) - 8,000 (cost basis) = -1,000 USD
- George sold the crypto in 2018 for 12,000 USD
- As this was a gain he takes on Sam’s cost basis of 10,000 USD to calculate his capital gains: 12,000 (sell price) - 10,000 (cost basis) = 2,000 USD