Tax Implications of Receiving Gifted Crypto Assets

This post covers the basics regarding the tax implications of receiving gifted crypto assets. The implications of the gift tax are not discussed.

What is the gift?

According to Section 102(a) of the Tax Code, gross income does not include the value of property acquired by free giftA will, innovation, or inheritance.

In deciding whether or not an object is a gift, the courts consider the motive of the donor—that is, if the gift was made from separate and uninterested generosity, it would be considered a gift.

WHEN CRYPTO IS PROVIDED AS A GIFT.

Your cost basis for donated crypto will be the same as your donor cost basis if you received crypto during the life of the donor (ie not an inheritance). This means that the cryptocurrency that the gifted person receives as a gift from a donor has value Migration basis.

Quick example:

If A buys BTC for $500 and gift it to B, B will basically assume it to be a carryover of $500. This is true even if BTC is worth $15,000 at the time of the gift!

When CRYPTO is given as a gift and sold for a loss.

*If the FMV of the crypto asset at the time of gift giving is less than the donor cost basis, your basis depends on whether you have a gain or loss when disposing of the property*

If the gifted cryptocurrency’s FMV at the time of the gift is less than the original cost basis of the giver and the donor subsequently sells it for a loss, then the donor’s basis for calculating the loss is the FMV at the time the gift is received.

Quick example:

B receives 1 BTC as a gift from A, who has a basis of $10,000 in BTC. At the time the gift was given, the FMV of BTC was $4,000. Next, B sells BTC for $3,500. B will recognize a loss of $500 (Proceeds: $3,500; Basis: $4,000).

$3500 – $4,000 = ($500)

But what if the FMV of the gifted cryptocurrency was above the donor’s cost basis at the time the gift was given and then sold below the donor’s base cost? The rule is to use the value lower than the FMV on the date of the gift or donor cost basis.

Quick example:

B receives 1 BTC as a gift from A, who has a foundation of $4,000 in BTC. At the time the gift was given, the FMV of BTC was $4,500. B eventually sells Bitcoin for $3,500. B will recognize a loss of $500. (Proceeds: $3,500; Basis: $4,000).

$3500 – $4,000 = ($500)

One key takeaway here is that if the donated property sells at a loss, the donor uses less of the property’s FMV at the time it was granted or the donor’s cost basis as the basis for calculating the losses.

What if the CRYPTO was given as a gift and was sold between the FMV on the date of the gift and the cost of the donor?

If, at the final disposition, the crypto-asset has an “in-between” basis, there is no need to recognize any income or loss. This occurs when the given property is sold at a price below the donor’s cost basis and above the FMV of the asset at the time of the gift. This only applies to gifts.

Quick example:

B receives 1 BTC as a gift from A, who has a foundation of $5,000 in BTC. At the time the gift was given, the FMV of BTC was $3,500. B finally sells Bitcoin for $4,500. B will not recognize any gain or loss from this sale.

There will be no gain here for two reasons:

1. For the purposes of calculating profit, the giftee will use a carry-over basis of $5,000, which will be greater than the sales price in this example.

2. For the purpose of calculating the loss, the sales price will be measured as $3,500 (FMV) (the lowest value of the asset at the time the gift is received against the donor cost basis).

If you use the grantor-adjusted basis to calculate the profit and loss, and then use the FMV to calculate the loss and gain, then you will get neither profit nor loss on the sale of the crypto asset.

Rules overview when the FMV is on gift date less than The basis of the donor:

1. For property sold with gains – modified use on grantor basis

2. For property sold with losses – use the property’s FMV

3. For property sold at a price between FMV and the original basis – there is no gain or loss.

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