Non-Taxable Transactions: Gifting and Donating

12/11/23 • 5 min

Gifting crypto assets to individuals generally will not have any tax implications unless you are super-rich; the inflation-adjusted lifetime exemption for federal gift tax (aka “death tax”) is $12.06 million per individual and $24.12 million per married couple in 2022. If you are receiving this much crypto as a gift, you should speak with an estate planning attorney. For the rest of us, gifts of more than the 2022 annual exclusion amount of $16,000 per individual and $32,000 per married couple create a reporting requirement with no financial impact. IRS Form 709 is used to disclose excess beyond the annual exclusion to the IRS, which is applied to your lifetime exclusion.

For example, Brandon and Kendra are married and agreed to split a gift of BTC valued at $100,000 to their son Bentley in 2021. Bentley does not have a reporting requirement; however, Brandon and Kendra each have to file a separate Form 709 showing $35,000 ($50,000 gift, less $15,000 exclusion) toward their lifetime exclusion amounts. The FMV of Bentley’s BTC is established on the date of the gift, but Bentley inherits his parents’ holding period and tax basis. If Brandon and Kendra bought the BTC for $10,000 more than a year before gifting it, Bentley has an unrealized LTCG of $90,000. Because cryptocurrency is property (not currency), if Bentley immediately disposed of the BTC for $100,000 upon receipt, he would have to recognize a taxable gain of $90,000 upon sale. For this reason, it would have been much better for Bentley to have received fiat currency (USD) than property (BTC). Had Bentley received $100,000 in cash he would never owe tax, but on the disposition of the crypto asset (BTC) he pays tax on the disposal of a capital asset.

Note also that Brandon and Kendra could jointly give $30,000 as a gift to an unlimited number of individuals and there would be no reporting requirement; as spouses, they can give unlimited gifts to each other (note that there is an annual exclusion limit of $164,000 in 2022 for spouses who are not U.S. citizens).

If Brandon and Kendra decide instead to donate BTC valued at $100,000 to a charity under IRC Section 501(c)(3) or other eligible organization described in Section 170(c), let’s say Bentley University, cryptocurrency being treated as property instead of currency may be beneficial. Where the couple bought the BTC for $10,000 as property with a LTCG, they won’t have to recognize the $90,000 gain and may be able to deduct the entire gift. Generally, individual taxpayers who donate cryptocurrency and itemize the deduction on line 12 of Schedule A (Form 1040) can deduct property subject to capital gains in full up to 30 percent of their Adjusted Gross Income (AGI). This means that if Brandon and Kendra’s AGI is $333,333 or more, they just knocked their taxable income down by $100,000 through donating BTC they paid $10,000 for. Depending upon their overall taxable income, this action could save them anywhere from $15,000 to $23,800 in capital gains tax at the federal level (and more when you consider state taxes). If their AGI is less than $333,333, they can carry over the suspended charitable contributions to future tax years.

Remember, the FMV of the crypto asset is determined on the date of the gift. Also note that cash donations and other non-capital gains property (cryptocurrency held for a year or less, for example) may be deducted in full up to 50 percent of their AGI to the extent of the lesser of the cost basis or FMV. For Brandon and Kendra this would only amount to a reduction in AGI of $5,000, so holding period is paramount. These tax rules vary by tax year and percentages vary by type of charitable organization and the source of funds (i.e., originating from an IRA for someone over 70 1⁄2 for example), so be sure to do your due diligence when planning gifts. Publication 526 explains how to claim a deduction for charitable contributions.

It discusses:
– Organizations qualified to receive contributions
– The types of contributions you can deduct
– How much you can deduct
– What records to keep
– How to report contributions

It discusses:
– Organizations qualified to receive contributions
– The types of contributions you can deduct
– How much you can deduct
– What records to keep
– How to report contributions

Previous Episode

Non-Taxable Transactions: Borrowing Crypto

Borrowing crypto assets is no different than borrowing from a traditional lender. The IRS does not consider a loan to be taxable income because it must be repaid. On the other hand, if a crypto loan with an initial USD value of over $600 is forgiven, you should receive a 1099-C for cancellation of debt (COD) income, which is taxable. If the loan provider requires an exchange of crypto for you to get the loan — for example, swapping ETH for cETH to get a loan in Compound (referring to https://compound.finance/) — a conservative approach would be to report the gain or loss, if any, that results from that transaction.

Next Episode

Non-Taxable Transactions: Receiving Crypto as a Gift

The IRS’s FAQ sums up the rules for receiving crypto as a gift:
“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. See Publication 559. Your basis in 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. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have 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. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero. Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift. However, if you do not have documentation substantiating that person’s holding period, then your holding period begins the day after you receive the gift.”

IRS Publication 559 is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent.

When a U.S. person receives gifts from foreigners, the gifts are not taxable; however, taxpayers may be subject to reporting requirements that come with hefty penalties if certain forms are not filed in a timely manner. When a U.S. person receives gifts from a foreign person, estate, or related-parties, the taxpayer may be required to aggregate such gifts, and if they exceed $100,000 alone or in aggregate, they must file IRS Form 3520 and may be required to file FinCEN Form 114 (FBAR) or Form 8938 (much more on these later).