Is there a crypto gift tax?

Are you looking to gift crypto to your kids and family and wondering about a tax?

Many people are gifting crypto to their young kids, prompting an investment mindset early on and introducing them to digital assets. Financial literacy is one of the most important areas to understand more through life, and gifting small investments to youngsters could be a great way for them to learn how to manage money.

However, since this trend is rising, many wonder if a crypto gift is a taxable event in the US. Today, we explore if there is a crypto gift tax in the US and its possible implications.

Are crypto gifts taxable in the US?

In the US, receiving a crypto gift is usually not a taxable event. It applies to the person receiving the gift and to the donor. There may be additional crypto tax reporting requirements, which we’ll explore later in this article. But, receiving a gift in crypto in itself is not taxable.

As a result, it doesn’t exist any type of a crypto gift tax. For more details, please check IRS Publication 551, Basis of Assets.

Do I have a cost basis for the crypto gift?

If you later sell the crypto you received as a gift, you’ll need to know your cost basis in the crypto for calculating your gain or loss on the trade.

Your cost basis equals either the FMV of the gift at the time of your receipt or the donor’s adjusted basis in the crypto they gifted to you, depending on whether the FMV of the crypto at the time of gifting is higher or lower than the donor’s adjusted basis.

Let’s imagine that your dad gifted you some crypto. When he bought it, the FMV was $5K. After one year, he gave the crypto to you, but now the FMV is $10K. In this case, you will inherit your dad’s original basis because the FMV of the gift is higher than his cost basis.

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Do I pay taxes if I later purchase something with that crypto?

Yes.

In the US, purchases of goods or services with crypto is a taxable event. Purchasing with crypto is taxable regardless of how you acquired the crypto, in this case, by a gift. As a result, you’ll have to calculate the capital gain or loss based on the difference between the price of the crypto at the time of the purchase and your cost basis.

Your capital gains tax rate for the purchase depends on your holding period. When you receive an asset as a gift, you inherit the donor’s original holding period. For example, let’s imagine that your brother gifted you some crypto that he bought two years ago, and you turn around and sell the crypto the day after you receive it. In that case, you still get a long-term capital gain treatment because you inherited your brother’s two-year holding period.

Do I need to report a crypto gift on my taxes?

In 2021, if you give less than $15,000 worth of crypto to each recipient as a gift, you don’t need to submit a gift tax return for the year. If you surpass the annual gift tax exclusion amount, you’ll need to file a gift tax return. If you are the recipient of a crypto gift, you usually don’t need to report it regardless of the gift value unless you received the gift from a foreign donor.

Since a crypto tax gift doesn’t exist, you don’t need to report the crypto you received on Form 8949 or anywhere on your income tax return. However, if you sell the crypto you received as a gift, it will be a taxable event, and there will be other requirements.

I gifted crypto to my son and he did some trading. Do I need to pay taxes on that?

If you gifted crypto to your son and he sold the crypto later, his crypto tax reporting requirements and capital gains tax will depend on his total taxable income. Under the current tax law, a child’s unearned income under $1,100 is not taxed, and the next $1,100 is taxed at the child’s tax rate. Moreover, any unearned income of more than $2,200 is taxed at their parent’s highest income tax rate, if higher than the child’s rate.

A separate tax return must be filed for children who have unearned income greater than $11,000 or any amount of earned income. If a child’s unearned income is less than $11,000 and greater than $1,100, the child’s unearned income can be included on their parent’s income tax return.

Crypto tax gift simulation: Dad gifts crypto so son, who later purchases a car.

1. Your dad buys Bitcoin and gifts 0.5 BTC to you

Your dad bought 1 BTC in December 2020 when it was $20,000. That’s his cost basis.

In January 2021, your dad gifted you 0.5 BTC. At that time, 1 Bitcoin was $28,000, resulting in an FMV of $14,000 for the crypto gift. At the time he acquired it, 0.5 BTC was worth $10,000.

Because the FMV of the gift is higher than the donor’s cost basis, your cost basis will be $10,000, which is your dad’s cost basis. In other words, you inherit your dad’s basis.

2. You buy a car that costs $10K

In August 2022, you want to buy a car with the BTC your dad gifted to you. Let’s say the 0.5 BTC your dad gave you is now worth $20K as Bitcoin’s price has risen.

If the car costs $10K, you only need 0.25 BTC to buy the car. Your basis for 0.25 BTC is $5K since your cost basis for the 0.5 BTC your dad gave you was $10K.

3. You pay long-term capital gains on top of the car expense

On top of the $10K expense to buy the car, when you file your tax return for 2022, you’ll have to pay capital gains tax for this car purchase.

Your capital gain on using that 0.25 BTC for car purchase was $5K ($10K-$5K), which will be taxed between 0% and 20%, depending on your personal tax situation (e.g., filing status). Let’s assume you are subject to a 15% capital gains tax rate in this scenario. A long-term capital gains scenario offers many advantages for investors.

You’ll have to pay $750 ($5K capital gains x 15% tax rate) in taxes on top of the $10K car purchase expense.

Even though receiving a crypto gift is not taxable, if you use the crypto gift for purchasing goods, investing in staking, gaining interest, or trading for other cryptocurrencies, these are all taxable events. Check our comprehensive guide on all major crypto taxable events to clarify any doubt.

*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.