Crypto Taxes and Accounting

How to Gift Crypto? Is a Crypto Gift Taxable?

Published
April 13, 2022
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    The thought of giving or receiving crypto as a gift would’ve been unheard of a couple of years ago. Now, it’s gradually becoming commonplace but as more and more people are learning about gifting cryptocurrency, there are a few questions that they ask frequently such as how to gift crypto? Is a crypto gift taxable? 

    This proves that the crypto space is no longer just a domain of fintech nerds. People with scant technological knowledge have heard about virtual currencies. However, investing in this asset class has varied opinions. While some crypto experts believe that digital money will never become mainstream and will eventually plummet in value, others believe that cryptocurrencies are the future. 

    No matter which side of the fence you are on, gifting cryptocurrencies cannot be dismissed as a bad idea. As more and more people are increasingly investing in crypto, the cryptoverse is growing in relevance. One good example is a growing number of e-commerce companies are now accepting crypto tokens as a method of payment. If we factor in the possibility of this asset class increasing in value over the years, cryptocurrency can become a gift that just keeps on giving. 

    How to Gift Cryptocurrencies?

    Today, buying cryptocurrencies is a cakewalk all thanks to their soaring popularity, thousands of crypto exchanges, and the potential to make buyers a lot of money. This also makes gifting a whole lot easier. Here are a few ways you can gift cryptocurrencies: 

    Gift Cards

    Who would’ve thought a decade ago that crypto gift cards are going to be a thing? As surprising as it is, several websites sell these cards. If you are planning to get one, look for a website that has good reviews, offers what you want, looks trustworthy, and then choose the amount that you wish to present and pay for it. 

    Once you make the payment, you’ll receive a gift card worth the amount that you deposited. The recipient will have to visit the same website, enter the details displayed on the card, and redeem the gift card.   

    Crypto Exchanges

    Another way to gift cryptocurrency is via a crypto exchange. The first thing that you need to do is create an account on a crypto exchange and choose a payment method. Once your account is all set up, buy a crypto token and it can be easily sent to someone’s wallet as a gift. 

    Storing Cryptocurrencies

    Once you buy the gift, you’ll need a safe place to store it. You can leave it at the platform you purchased it from, but it is usually advisable to store it offline where the chances of stealing it or hacking it are really low. 

    Paper Wallets

    A paper wallet is the cheapest way to store crypto tokens offline. By visiting a specialized website, you can create a paper wallet and after that, it randomly generates keys and corresponding QR codes that are printed on a piece of paper along with other important information that is required to access your tokens and facilitate transactions. 

    You have to ensure that the printed paper wallet is not lost or damaged. If it happens, the receiver of the gift would no longer be able to access the tokens sent to their wallet address. 

    Hardware Wallets

    A hardware wallet is the most secure storage solution as it is essentially a USB drive device. These devices are virus-proof, waterproof, compact, and regarded as the best place to ensure that the private keys are secure and safe. Hardware wallets are not connected to the internet, which makes them harder to hack as compared to a smartphone or a laptop. They are available online and can be bought fairly easily at various features and prices. 

    Physical Coins

    If you are wondering how to gift crypto in a fancy way then physical coins are the way to do it. Physical coins are quite elegant to look at and can be a good tool to09 store digital currency.  

    Each coin has a redeemable private key and unique address located under a tamper-proof hologram. Apart from being useful storage devices, these coins have become collectible items as well. This means that these coins will appreciate in value in the future. 

    How Are Cryptocurrency Gifts Taxed?

    Gifting crypto to your friends and family is not a taxable event unless the gift exceeds the gift tax allowance, which is $16,000. The IRS only needs to be alerted when the recipient eventually sells the asset. If the recipient sells it under a year at a profit, it is considered as ordinary income and has to pay short-term capital gains tax. Anything above a year is considered a long-term gain and taxed at lower capital gains rates. 

    The taxable amount is determined by how much the gift was worth at the time of purchase by the sender. For instance, if you sent a gift of $100 and then the recipient sold it five years later for $500, the recipient would have to pay taxes on the $400 profit. 

    The sender of the gift has to ensure that they record how much they paid for the gift at the time of the purchase and at the time they transferred it. If this information is missing, the recipient will have a $0 cost basis, increasing their taxes. 

    The recipient can use losses as deductions, but it works differently in the case of a gift. It will only count as a capital loss if the asset was sold for less than it was bought and transferred by the sender. In case a loss occurs and it is more than the capital gains, individual tax filers can claim up to $3,000 while married investors can claim $1,500 each. 

    Tax Implications For a Gift Giver

    If you send a gift as crypto then the entire gift is tax-free and it will be seen as you never bought or disposed of the token. 

    For instance, if you bought 1 BTC for $10,000 in October 2019 and then sold it in February 2021 for $15,000, you’d have to pay taxes on $5,000 in capital gains. 

    However if you gifted 1 BTC to either your friend or family, you as a sender won’t be liable for any tax so much so, your generosity will be compensated with tax savings. 

    Tax Implications For a Gift Recipient 

    If you receive crypto tokens as a gift, there are potential benefits for you if you follow these steps below:

    • You need to get the asset acquisition information from the gift giver.
    • Then, you can adopt the gift sender’s holding period and their cost basis as well.  

    Tax Advantage of Adopting a Giver’s Holding Period

    If you as a gift recipient know the gift’s acquisition date, the IRS allows you to adopt the gift’s holding period. In case you are wondering why this is beneficial, it is because adopting a holding period makes you as a recipient eligible for long-term capital gains tax if you decide to sell it. 

    Tax Advantage of Adopting a Giver’s Cost Basis

    If you know how much was initially paid for the gift, you may be able to adopt the cost basis too. The adoption of a cost basis depends on whether a gain or loss was incurred when the gift was sold and converted to fiat currency or other digital currency. 

    When you receive a gift, there are three outcomes:

    • The proceeds are more than the sender’s cost basis
    • The proceeds are less than the sender’s cost basis and the fair market value while gifting. This decreases the cost basis of the receiver in the asset. 
    • The proceeds exceed the fair market value and subceed the cost of the sender while gifting. It helps you avoid tax implications on the gift. 

    Which Cryptocurrency Would Make a Good Gift?

    CoinMarketCap, the world's most-referenced price-tracking website for crypto assets, keeps a live count of crypto assets, a number of exchanges, and the total market capitalization. In Feb. 2022, the number of cryptocurrencies available is over 17,500 and that makes choosing a token for gifting harder than ever. 

    If you or the person receiving the gift have something specific in mind, it is best to stick to more mainstream and well-established tokens such as Bitcoin, Ripple, Ethereum, Solana, Cardano, and more. In recent years, there has been a surge of new and cheaper entrants in the market, but it is yet to be seen whether they will gain the same amount of popularity and become more established coins. 

    The crypto market is highly volatile and it is important that you review your options before making a purchase. Do some research on the coins that you think are worth buying, weigh in their future potential, and figure out if it’s reflected in the price. It is also recommended to consider what the recipient might want as a gift. 

    Final Thoughts

    Today, gifting crypto has given a whole new meaning to practical gifts. By gifting someone with crypto, you are not only disposing off the tokens without any tax implications, but you are also providing some with an investment that might grow significantly in the future. Lastly, if you are a receiver of the crypto gift, find a safe place to store your gifts.

    How to Gift Crypto? - FAQs

    1. Can I gift cryptocurrency?

    Yes, you can gift cryptocurrency. Several online retailers sell crypto gift cards. If you are planning to get one, look for a website that has good reviews, offers what you want, looks trustworthy, and then choose the amount that you wish to present and pay for it.

    2. How do you send cryptocurrency to someone as a gift?

    Usually, you can send cryptocurrencies as a gift by logging into the account where you hold them and sending them to the recipient’s wallet address, which is a long string of characters. Thankfully, you can also use QR codes, which remove the stress of wrongfully entering the wallet address and sending it to the wrong person. You can also use gift cards and physical coins to send someone crypto tokens as gifts. While gift cards are some of the oldest ways to send crypto gifts, physical coins are one of the fanciest ways.

    3. How to gift crypto wallet?

    If the person you are gifting is already an investor, they will have a crypto wallet. If not then you can leave it at the platform you purchased it from, but it is usually advisable to store it offline where the chances of stealing it or hacking it are really low. A paper wallet is the cheapest way to store crypto tokens offline but a hardware wallet is the most secure storage solution as it is essentially a USB drive device. These devices are virus-proof, waterproof, compact, and regarded as the best place to ensure that the private keys are secure and safe.
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