*USA Only*

Introduction

I have been getting a lot of similar questions around how crypto gifts are taxed, so I thought I’d make a post breaking it down and clarifying some of the recurring questions. See the bottom for some strategy on how to optimize gifts and donations.

When receiving a gift, you do not pay any tax.

Receiving a gift is a tax free event for the recipient.

When giving a gift, you may be subject to the “gift tax”.

For gifts over the annual exclusion limit ($17k for 2023), you must report the gift on Form 709 where you’ll follow the steps to determine if tax is owed. The gift tax amount is not fixed and can range from ~0%-40% on the amount over the exclusion limit. There is also a lifetime limit ($12.92M for 2023).

Do the recipient of the gift a favor and provide them with your cost basis, they’ll need it later.

As the recipient of a gift, you will be subject to capital gains tax when you sell the gift.

Capital gains/(losses) = Selling price – Cost basis. For gifted property, determining cost-basis can be challenging. You can only determine your cost basis once you sell as it changes depending on the value of the gift at sale. This is one of the few rare instances where cost basis is variable and not fixed. The three key data points are (1) the Fair Market Value (“FMV”) of the gift on the day you receive it, (2) the Selling price of the gift, and (3) the gift giver’s adjusted cost basis.

Below are the three possible scenarios and the resulting cost basis each (with a bonus fourth for when you don’t know the gift giver’s cost basis). For direct IRS guidance on these, see Publication 551, page 9.

You sell your gift for less than the FMV of the gift on the day you received it. Your cost basis is the lower of (1) the gift giver’s adjusted cost basis or (2) the FMV of the gift on the day you received it. This is the only scenario where a capital loss is possible. The sell price would need to be less than both of the above in order for a capital loss to be realized. You sell your gift for more than the FMV of the gift on the day you received it, AND more than the gift giver’s adjusted cost basis. Your cost basis is equal to the gift giver’s cost basis, regardless of the FMV of the gift at time of receipt. You sell your gift for more than the FMV of the gift on the day you received it, BUT less than the gift giver’s adjusted cost basis. You actually do not have a taxable event here. This is one of the very rare instances in which selling property does not result in a capital gain/loss taxable event. Bonus: The gift giver’s cost basis is unknown/undocumented. Your cost basis is deemed to be $0. In other words, you will have a 100% capital gain on the sale. Unfortunately, the IRS has been explicit about this, see the IRS Crypto FAQ, Q32.

If you sell your gift in pieces (as opposed to all at once), you will need to assess each piece independently using the above framework.

In order for something to be deemed a “gift”, it must meet certain requirements.

In order for something to be deemed a “gift”, it must meet certain requirements. In short, a gift is when there is a transfer of property/currency from one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift if the transfer meets these criteria. Additionally, a gift can be the allocation to an individual of income being generated from property when receiving nothing or less than full value in return, the sale of property at less than its full value, or if you make an interest-free or reduced interest loan. I’ve summarized straight from the source, but if you’d like to read the direct IRS guidance, here it is IRS Gift Tax.

Just because its been asked a lot… No, if you provide a service to someone and they give you crypto in return, it is not a “gift”. It would be considered ordinary income and would be taxed as such. Your ordinary income amount to be reported would be the FMV of the crypto received on the day of receipt. This would also be your cost basis for when you sell and need to calculate capital gain/loss.

Tax Strategy

When giving a gift (or donation) in crypto, you will want to be careful with which cost basis lots you are giving. For example, a high net worth client of mine holds over 1,000 ETH. Some of that (160 ETH) was purchased at a mere $45/ETH. Some purchased as high as $3,500/ETH. This client makes gifts and donations regularly from his crypto holdings.

Using the “Specific ID” cost basis accounting method, we are allowed to choose which cost basis lots are being gifted. In this scenario, it is favorable for my client to gift the units purchased at $45/ETH as opposed to $3,500/ETH. At the end of the day he is still giving up the same amount of ETH, but it is better for him to offload his low cost-basis ETH as opposed to his high cost-basis ETH as this will help reduce his taxable gain if and when he sells those ETH.

If you have ultra low cost-basis coins, gifting/donating is one of the few ways you can offload them from your portfolio without paying taxes (if below the gift tax threshold).

Conclusion

There you have it. That is how gifts are taxed. There seems to be a lot of confusion (rightfully so) on how to handle crypto gifts. So I’ve linked straight to IRS guidance for each piece in order to avoid misinformation.

Disclaimer: This is not tax advice but rather a discussion on how crypto gifts are taxed. Always do your own research and talk with your own tax professionals. If you live in a country other than the USA, please do your own research for the laws applicable to you.