How Are Cryptocurrency Gifts Taxed in 2023?
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Giving or receiving a cryptocurrency gift does not trigger a taxable event. However, the way the recipient uses the gifted cryptocurrency can affect their tax liability in the future.
Gifting crypto to friends, family, or recognized nonprofits can help avoid capital gains taxes. For US taxpayers, donations to tax-exempt organizations, when held for over a year, can reduce income tax liability while supporting charitable causes.
What are cryptocurrency gifts?
We can think of cryptocurrency gifts as presents of digital money that can be sent and received online. You can make a personal crypto gift to friends or family or donate crypto to a qualifying 501(c)(3) organization and get a tax break in return.
When it comes to crypto gift tax, typically giving cryptocurrency as a gift doesn't mean you or the recipient have to pay taxes right away. But the way the recipient uses it could affect their taxes later. So, cryptocurrency gifts are a modern and interesting way to share digital money with friends, family, or organizations you want to support.
How does gifting crypto work
There are a few things to consider before giving crypto. First, you need to decide which type of cryptocurrency you want to give. Bitcoin is of course the most famous cryptocurrency, but there are many others like Ethereum, Litecoin, and thousands of altcoins.
You can use apps like Cash App, Coinbase, or Robinhood to send crypto easily. Or you can send it directly to the recipient's digital wallet. Just be sure you have the correct wallet address and completely understand the process before transferring any crypto.
This article pertains to crypto gift tax for US taxpayers. International taxpayers should refer to their local regulations and our helpful international crypto tax guides for further information.
Is a crypto gift a taxable event?
When you receive a gift of crypto, it's good news from a tax perspective: receiving a crypto gift is not considered a taxable event, meaning you don't have to report it as income on your tax return. There is no special crypto gift tax for US taxpayers. So, if a generous friend or family member gives you some cryptocurrency, you won't owe any crypto tax on the gift upon receipt.
Cryptocurrency gifts below $17,000 in value for 2023 are tax-free for the giver and don't require IRS reporting. However, when a gift exceeds this threshold, the giver needs to notify the IRS by submitting Form 709. Gifts surpassing $17,000 count against an individual's lifetime gift exemption, which is $12.92 million in 2023.
If you're a gift recipient, be aware that taxes will likely come into play when you decide to sell or dispose of the crypto gift in the future. At that point, you could be subject to capital gains or losses, depending on whether the cryptocurrency's value has gone up or down since you received it.
While receiving a crypto gift is a tax-free event, you may need to consider the tax implications when you decide to sell or use that cryptocurrency down the road, based on how its value has changed since the gift was given.
Giving a crypto gift
If you give a crypto gift, this is not a taxable event. However, make sure the recipient knows the cost basis of the asset that you are giving to them. See the “letter to prove the crypto gift” below for more details concerning what you should provide the person to whom you’re gifting crypto.
Receiving a crypto gift
If you receive crypto as a gift, this alone is not a taxable event and you don’t recognize it as income. In other words, you do not immediately pay crypto tax on a gift. You will only have tax consequences on crypto you receive as a gift when you sell it.
Selling a crypto gift
You realize capital gains or losses on crypto when you sell a crypto gift you’ve received.
If you sell the asset for a gain (i.e. more than the giver’s cost basis), then your cost basis for that sale is equal to the donor’s basis.
If you sell the asset for a loss (i.e. less than the giver’s cost basis), then your cost basis is the lesser of either the donor’s cost basis or the fair market value at the time you received the crypto.
If you don’t know the giver’s cost basis, you must recognize a $0 cost basis for the sale.
Your holding period (to determine short- and long-term crypto tax rates) includes the holding time of the person who gave you the crypto. If you don’t know when they acquired the crypto, your holding period begins when you receive the gifted crypto.
Be sure to include gifts in your cryptocurrency tax software account, as it's necessary to account for assets received or given.
Letter to prove the crypto gift
A gift letter, a simple yet crucial piece of written documentation, serves as a legal declaration that money you've received from a friend or family member is a bona fide gift. Gift letters are significant in various contexts where the source of funds needs clarification.
Gift letters act as an official record of your financial transaction. A crypto gift letter typically includes essential details including:
The names of the donor and recipient.
The date of the gift.
The fair market value of the gift when given.
A clear affirmation that the gift is not expected to be repaid.
The donor's signature to validate the intent.
The date the crypto was originally acquired.
The cost basis of the original crypto acquisition.
These elements work together to create a legally binding document that ensures both parties are on the same page regarding the nature of the financial transaction.
Is a crypto donation a taxable event?
No, a crypto donation to a 501(c)(3) nonprofit is generally not considered a taxable event. This means that when you make a donation in cryptocurrency, you typically do not have to pay capital gains tax on the amount donated. However, there are some essential considerations to keep in mind, particularly if you're a US donor.
Cryptocurrency donations to nonprofit organizations with a 501(c)(3) tax-exempt status are usually tax-deductible. This means that you may be eligible to receive a tax deduction for the value of your donation.
Making a crypto donation
Making a crypto donation is similar to gifting to individuals. If you donate to a qualified 501(c)(3) not-for-profit, it's essential to report your crypto donation to the IRS in order to take advantage of corresponding tax benefits. Doing so ensures that you can realize the potential tax deductions associated with your contribution.
Even if you value your privacy and wish to donate cryptocurrency anonymously, it's advisable to consider obtaining a donation receipt from the nonprofit. While you can protect your anonymity by using secure methods like a ProtonMail email address, reporting the charitable donation to the IRS is still crucial to ensure compliance with tax regulations and to make the most of the available tax benefits.
Receiving a crypto donation
Accepting crypto donations as a nonprofit organization can be accomplished through two primary methods:
Hands-off Approach: Use a crypto payment processor like BitPay to accept crypto donations on your nonprofit's behalf and convert them into fiat currency for a small fee. This method simplifies the process, with the payment processor handling technicalities such as wallet creation and regulatory compliance, making it a swift and straightforward way to receive crypto donations.
Hands-on Approach: Receive and hold cryptocurrency directly in a crypto wallet managed by your organization. While this approach provides greater control, it also requires you to manage the technical aspects of cryptocurrency wallets. To ease the process, consider utilizing third-party plugins and platforms that seamlessly integrate with your existing nonprofit systems.
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Tax deductions for crypto donations
If you donate crypto to a 501(c)(3), then you are not liable for tax on the asset, and you can benefit from a charitable deduction.
If you held the crypto given for over a year, then the deduction amount is equal to the fair market value of the crypto given.
If the crypto is held for under a year, then the deduction amount is the lesser of the crypto’s cost basis or fair market value.
For more info on crypto tax basics, visit our crypto tax guide.
Frequently asked questions about crypto gift tax
Here are answers to frequently asked questions about crypto tax on a gift, crypto gift tax, and how to gift crypto and avoid taxes.
Can the IRS track crypto gifting?
Yes. The best approach is to assume the IRS has full transparency into your crypto transactions, including gifts.
How much crypto can you gift tax free
Gifts of cryptocurrency valued under $17,000 (for 2023) do not incur any tax obligations for the giver, and there's no need to report them to the IRS. However, if the gift exceeds $17,000, the giver must inform the IRS by submitting Form 709. It's important to note that gifts over $17,000 count towards an individual's lifetime gift exemption, which is $12.92 million as of 2023.
The $17,000 threshold applies per recipient, and you can give this amount or less to multiple individuals while still benefiting from the tax exemption. But if your gift exceeds $17,000 to a single recipient, you must complete Form 709 for reporting purposes.
How to gift crypto to avoid taxes
If you give crypto to friends or family, you’ll avoid the tax consequences associated with selling your crypto for a capital gain. Beyond personal gifts, crypto donations to IRS-recognized 501(c)(3) organizations can offer tax benefits.
If you've held a cryptocurrency like Bitcoin for over a year and donate it to a tax-exempt organization without converting it or cashing out, you won't owe capital gains taxes on any profits from the donation. Additionally, this donation can potentially reduce your ordinary income tax liability, typically by 30-50%, depending on the organization and your tax filing method.
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