What are the legalities of gifting cryptocurrencies? The first thing to remember about the legalities of cryptocurrency is that there is a potential tax burden for those who buy, sell, and trade in virtual currency, and the IRS’ rules are NOT the same as other, more traditional investments. And that is the focus of this article — the IRS rules for gifting cryptocurrencies. Why? Because that’s the area where those who use Bitcoin, Ethereum, and others are most likely to get into trouble if the rules are not fully understood.
What follows should not be construed as tax advice. The only advice you should take on taxes should come from a trained tax professional or the IRS itself. What follows is for informational purposes only.
Legalities Of Gifting Cryptocurrencies
It is legal to give cryptocurrency as a gift. It is legal to receive cryptocurrency as a gift. The laws of America are not the only ones that may come into play in these situations–if you are doing a transaction with an overseas buyer, seller, gifter, or giftee, the laws of that person’s country may also affect your transaction. You should take care to learn what international laws may affect your gift or transaction BEFORE you initiate it.
Are Cryptocurrency Gifts Income?
The IRS does NOT define cryptocurrency as money. It defines Bitcoin and others as PROPERTY, and that is a very important distinction to make. However, you may earn income from cryptocurrency which is taxable. If you sell Bitcoin and receive actual legal tender in exchange for it, that legal tender or the digital equivalent of it may be subject to taxation. Failure to report these sales and the income they generate is actionable–don’t tempt fate by failing to report.
There are other nuances–from the IRS official site, we learn that determining the tax liability for virtual currency received as a bona fide gift “differs depending on whether you will have a gain or a loss when you sell or dispose of it.”
IRS rules say that when determining whether a taxpayer has a certain gain, “your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift.” For determining a loss, “your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift.” The IRS reminds taxpayers that in cases where you do not have any documentation “to substantiate the donor’s basis”, the IRs says your basis is zero.
Don’t forget the crucial IRS advice about receiving a gift of virtual currency. “If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency”. As mentioned above, it is the recipient’s duty to report such income.
If you are not sure how these issues affect your financial bottom line. Ask a tax expert for help determining what portions of the IRS rules apply to you when gifting cryptocurrencies or receiving them as a gift.