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By: Sharon Yip, CPA
Gifting cryptocurrency to friends and family is quite common amongst crypto users, especially during a bull market like now. Before you send out bunch of coins to other people as a gift, there are several things you need to know.
Gifting cryptocurrency is treated just like gifting any other property. It may or may not be a taxable event. IRS Publication 551 provides guidelines for the calculation of the basis of property received as a gift, which applies to the gifting of cryptocurrency as well.
The donor is responsible for filing a gift tax return (Form 709) and paying gift tax if certain thresholds are met. Some gifts are exempted from gift tax. The exceptions include:
• Gifts to a spouse who is a U.S. citizen or resident
• payments for tuition or medical expenses if paid directly to the institution
• gifts with an FMV less than the annual gift tax exclusion amount
• gifts to a political organization
If you are a gift recipient, you need to get the following information from the donor:
• The date the donor acquired the coin
• The adjusted cost basis to the donor right before the coin is gifted to you
• The coin’s fair market value (FMV) in USD at the time the donor gifted the coin to you
• The amount of any gift tax paid by the donor on Form 709 with regard to the coin that was gifted to you
We recommend that you request the donor to provide you with a gift letter that includes the above listed items so that you can use it to support your basis and holding period for the crypto that you received. You will need such information to calculate your gain/loss when you sell the crypto later.
Basis and Gain/Loss Calculation
There are two calculation methods, depending on the FMV of the property at the time of the gifting.
(1) FMV of the gift >= donor’s adjusted basis
The first situation is FMV of the property at the time of the gift equals to or is greater than the donor’s adjusted basis.
In this case, the basis for the recipient equals to the adjusted basis for the donor. This is known as “step into the shoes” or “carryover basis.”
When the recipient disposes of the gifted property, gain or loss is calculated by Sales Proceeds minus donor’s adjusted basis plus or minus any required adjustments to basis when the recipient is holding the property.
(2) FMV of the gift < donor’s adjusted basis
The second situation is the FMV of the property at the time of the gift is less than the donor's adjusted basis.
In this case, your basis depends on whether you have a gain or a loss when you dispose of the property.
Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property.
Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property.
Special Situation for Basis Calculation
There is a “special” situation in which if you use the donor’s adjusted basis for figuring a gain but you get a loss, and when you use the FMV of the property at the time of gifting for figuring a loss but you get a gain. In such case, you have no gain nor loss on the sale or disposition of the property.
This situation occurs when the FMV of the property at the time of the gifting is less than the sales proceed received by the recipient on disposal of the gifted property, which in turn is less than the donor’s adjusted basis.
i.e., FMV of the property at the time of gifting < sales proceed received by the recipient upon disposal of the property < donor’s adjusted basis