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Posted by Dennis Jao

Crypto as a Gift & What You Need to Know About the Tax Implications

Crypto as a Gift & What You Need to Know About the Tax Implications

The idea of offering or receiving cryptocurrency would have been unheard of some years ago. Now, this is completely normal. According to a recent BlockFi poll, one in 10 people donated cryptocurrency last Christmas.

Popular currencies such as Bitcoin and Ethereum hit all-time highs in November 2021, although their prices have fallen since then. It has become easier for ordinary investors to buy digital assets through platforms like Paypal and trade them with popular exchanges like Coinbase and Binance. Many of these platforms have further simplified the provision of crypto giveaways by promoting specific features and functionality to their users.

But there are a few things to consider if you gave or received cryptocurrency in 2021.

Like the starting costs, Bitcoin and other virtual cryptocurrencies are classified as "goods" and are taxed like other common goods, such as gold or stocks. Therefore, you may need to pay taxes in 2022 for any cryptocurrency delivered to you in the past year if you made a profit on the sale. Simply donating your cryptocurrency is not a taxable event unless you have exceeded the $15,000 tax deduction.

Donating cryptocurrency is also very similar to donating a lottery ticket. The giveaway can be a big hit for loved ones, or it just can't go anywhere.

Then there is the question of interest in cryptocurrencies. Some people may not want to incorporate cryptocurrencies into their wallets and see no point in holding them.

But which cryptocurrencies you choose to gift in the future or have been gifted to you in the past can go a long way in determining whether they are potentially valuable to the recipient or rather an innovative gift.

If you're giving away a piece of Bitcoin or Ethereum, then you're about to give someone something of value. And at that point, it starts to look like the gift of a stock or share or something.


What to consider if you gifted or received cryptocurrency in 2021

Bitcoin reigns as the cryptocurrency of choice for gifts and receipts, with Dogecoin and Ethereum in second and third place, according to data from BlockFi. But, as with any new investment, whether it's a donation or a trade-in, it's important to do your findings and understand all the risks.

As more investors wonder how to put cryptocurrency in their wallets, experts recommend sticking with Bitcoin and Ethereum and following the 5% rule, which means you don't contribute more than 5%. % of your portfolio to resources risks such as cryptocurrencies. It is also recommended to treat it as a long-term investment. Still, you should never invest in cryptocurrencies at the expense of other financial priorities, such as paying off high-interest debt and saving for emergencies.

Here's what to look for if you've donated cryptocurrency in the past year or received such a gift.


Tax Implications

As long as you donate less than $15,000 worth of cryptocurrency, it is included in the 2021 gift tax allowance. This implies you won't have to worry about the tax implications that come with the gift.

If you gift a cryptocurrency of $15,000 or less, there is no tax impact. If you gift $30,000 worth of cryptocurrency, the difference between $15,000 and $30,000 is taxable as a gift and taxable to you as a donor.

Despite the donation tax exemption, recipients may be required to pay taxes on their cryptocurrencies in the future, even if they sell them immediately after they receive them. It depends on the gains or losses of the cryptocurrency when the recipient of the gift sells or transfers it; essentially, the value that their holdings have gained or lost over a period of time.

If your cryptocurrency gains value over time, you will have a gain on the sale or transfer. The time you own it also affects the amount you owe in taxes. Any cryptocurrency held for less than a year is a short-term gain. Suppose you've owned it for over a year. These dissimilarities may affect the tax rate applied. The tax rate also varies based on total taxable income, and there are limits to how much you can deduct from the capital loss if the cryptocurrency loses value.

Of course, there is an advantage to owning taxes related to cryptocurrency. If you have to pay taxes, it means you've made money from it.

The opposite of capital gains is a capital loss. If your gains are less than your losses, you can deduct up to $3,000 from taxable income (for individual taxpayers).

If you are an independent tax filer, please refer to Form 8949 to reconcile your gains and losses and then report them on the 1040 Income Tax Form using Schedule D. 

Keeping a comprehensive transaction history will come in handy during tax season, whether you are personally filing taxes or working with a tax expert.

Since crypto is a new and evolving asset class, expect many changes in the way cryptocurrencies will be regulated in the coming years and bring in experienced tax professionals who are familiar with digital assets for a smoother filing process.


Volatility

Cryptocurrency is a high-risk, high-return investment. In other words, your cryptocurrency may increase in value over the next several years. But there is also the possibility of completely losing its value, leaving you with only your experience. If you are gifting cryptocurrency, make sure the recipient understands the risks of owning and investing in cryptocurrency.

Take a look at Bitcoin - it hit a record high of over $68,000 in November 2021, having started the year with just under $30,000. Meanwhile, Ethereum went from around $737 to around $3,000+. And it's not uncommon for some of them to lose 15% of their value in an hour.

While volatility can be a huge downside to providing cryptocurrency, it can also be an advantage depending on how you perceive cryptocurrency. If you have Bitcoin, it can go through the ceiling or crash in a couple of hours. There are people who say that Bitcoin is the future of transactions and that Bitcoin will take over. And if so, the value horizons for Bitcoin are endless.


The acquisition process

If you decide to donate cryptocurrencies in the future, you will need to know how to actually send them. Although cryptocurrency has been a popular offering over the past year or so, many people don't have information on how to actually go about it, according to data from BlockFi.

Two common ways to provide cryptocurrency are gift cards that can be exchanged for cryptocurrency or sent directly to someone via a wallet-to-wallet exchange. If you already have an account with a cryptocurrency exchange, this might be the best place to start, as it offers the advantage of a first-person experience that can be shared with the person you're gifting.

But both the recipient and the donor and the donor will need a crypto wallet to complete the transaction. If you are gifting cryptocurrency to an individual who does not yet have a wallet, they will need to create one to be able to receive the gift.

Crypto gift cards usually involve third parties, which can add complexity to both the recipient and the sender. Ensure you understand and share what it will take for your recipient to successfully receive the gift.


Transaction Costs

Another thing to consider is the fees, which are usually billed on a per-transaction basis and may vary whether you are the seller or the buyer. Many different fees depend on the currencies you trade, so it's important to understand exactly how and when an exchange may charge you for your crypto transactions.

Coinbase does not charge a fee for transferring cryptocurrencies from one Coinbase wallet to another, for instance. But the recipient of the crypto will be charged a fee if they sell or transfer the cryptocurrency as a gift outside of the Coinbase platform, which may reduce the value of the gift. Sometimes, the transaction costs are generally quite high.


Limited knowledge or interest

Cryptocurrency became very popular in 2021, but many people are not yet interested or have limited knowledge. If you've received cryptocurrency, consider whether you want to sell it immediately or hold it as a long-term investment and how that may affect your taxes this year. There is nothing wrong with giving or receiving cryptocurrency. You just have to be clear on what you can do about it.


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Dennis Jao
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