Gifting cryptocurrency to another person
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Cryptocurrency gifts may be non-taxable to both the giver (donor) and recipient, so long as you do not exceed the annual tax exclusion threshold ($15,000 per recipient per year for tax year 2021) or lifetime gift tax exclusion. When giving a gift, the donor should provide information on the original cost basis and date of acquisition, since the recipient will inherit the original cost basis and date from the donor. If the gift is over $15,000 then it will need to be reported on a Gift Tax Return (Form 709).
A good rule of thumb for anyone receiving cryptocurrency as a gift from another is that in most cases, the recipient will inherit the cost basis and holding period of the donor.
If a donor in 2021 gave you 1 BTC that he bought in 2013 for $12, even though the FMV of that BTC when you received it may be much higher than $12, your cost basis would be $12. The recipient of a cryptocurrency gift does not incur a taxable event until you dispose of the gift, which will be treated as capital gains. Continuing our example from above, you would subtract the proceeds you received from disposing of that 1 BTC from the original cost basis of $12. That difference would be your capital gain.
However, it is important to note that the previous example only applies if the fair market value of the gift at the time you received it was equal to or more than the donor's adjusted cost basis. If the fair market value of the gift at the time you received it was less than the donor's cost basis, then the cost basis for your disposal is either the donor’s cost basis if you’ve realized a gain or the fair market value of the gift at the time you received it. This approach ensures there is no sharing of losses in order to deduct against capital gains.
Let’s illustrate this point with some additional examples.
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:
Under this example, Ben saw a $300 capital gain when he sold the crypto Dave gave him.
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 of $15,000, 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. If George did this, the sale would have been a loss. As such, his cost basis would have been the fair market value from when he received the gift, which was $8,000. Under this scenario, George would have experienced a $1,000 loss.
George sold the crypto in 2018 for $12,000 USD. As the sale was a gain, he takes on Sam’s original cost basis of $10,000. As such, George would have experienced a $2,000 gain, as he would have inherited Sam’s cost basis.
