The Bitcoin value bubble continues to make headlines; I tend to watch the speculation from the sidelines knowing that there are three things that noticeably drive investments; fear, anticipation, and the herd mentality. Bitcoin–as an investment–is incredibly risky in the traditional sense because there is no regulation, no central control, and the market is rife with volatility.
Yet, Bitcoin persists. A January 12, 2021 Business Insider (BI) article reminds that this cryptocurrency has managed to weather not one, not two, but THREE of what BI refers to as a “peak-to-trough drawdown” of more than “80% in less than 10 years”.
Is Bitcoin experiencing a bubble? That is a stupid question in the minds of some, but consider the newcomer to the cryptocurrency market who may or may not even have basic trading experience; what are these people supposed to make of an investment opportunity that started 2020 in the $6k range according to a CoinDesk Bitcoin price tracker, and ends 2020 pushing into the $20K price range?
New To Investing?
Newcomers, if you aren’t familiar with the basics of investing, know that the combination of this massive increase in value combined with a lack of the sort of stability legal tender has by comparison and it’s clear that while some investors are likely going to make a killing, there is a definite risk of a market correction. And where “altcoins” are concerned? Their futures may look rosier with a Bitcoin price adjustment.
Is it smart to receive salary in cryptocurrency? Opinions vary, but much depends on how much of your salary is paid in cryptocurrency, the state of the market, and other variables. To begin this discussion, let’s examine two things the federal government of the United States advises consumers about where cryptocurrency goes.
The Nature of Cryptocurrency
The Federal Trade Commission official site reminds us, “Cryptocurrencies are not insured by the government like U.S. bank deposits are. This means that cryptocurrency stored online does not have the same protections as money in a bank account.” That fact alone warns a lot of people off having their salary paid in cryptocurrencies such as Bitcoin or Ethereum.
Some want to know about the economic incentives of running an Ethereum node. This practice differs from buying and selling Bitcoin or other cryptocurrencies because maintaining an Ethereum node requires more technical know-how from those who seek to make money or earn direct monetary benefits from doing so.
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.