Have you ever gifted cryptocurrency to someone else, or received crypto as a gift yourself? Donated bitcoin or another crypto to a charitable organization, and now you wonder if you are actually taxed on the amount you sent? In this article, we will explain everything you need to know about the taxation of cryptocurrency gifts and donations, and how to report this on your tax return.
Tax on Gifts
Taxation rules for gifting cryptocurrency can be quite overwhelming at first, so we will try to break this down into digestible information so you can report this correctly and avoid any trouble with the IRS.
The annual gift exclusion is $15,000 for 2019 in the US, meaning that if you have either received or sent gifts below this threshold, the cryptocurrency is in general not taxed for both the receiver and sender. However, there are two different scenarios you need to consider for gifts:
Scenario 1: FMV > Sender’s Cost Basis
The most simple scenario is when the fair market value (FMV) of the coin is higher than the sender’s original purchase price (cost basis). In this case, the receiver simply acquires the sender’s cost basis including the holding period. Neither the sender nor receiver is taxed on the date of the transaction, and the receiver is first taxed when/if selling the coins later in the future.
Let’s look at an example: Maria bought 5 ETH for $450 in 2017, and gifted 2 ETH to her friend Rebecca in 2020 when the price of ETH was $285 (per coin). Rebecca takes on the cost basis directly from Maria, and she owns now 2 ETH with a total cost basis of 2/5 * $450 = $180. A few weeks after receiving the gift, she decides to sell all her coins (2 ETH) in exchange for $620 in total. Rebecca has now realized a long-term capital gain of $620 – $180 = $440 which should be reported on IRS Form 8949 (USA).
Scenario 2: FMV < Sender’s Cost Basis
If the price at the time when the cryptocurrency is gifted is less than the sender’s cost basis, things start to get a little bit more complicated. What cost basis the receiver takes on depends now on what price the coins are later sold at. Let’s explain this using an example:
Michael bought 0.5 BTC for $8,000 in December 2017. Two years later he decides to gift his bitcoin holdings to his friend Damien at a time when the price of bitcoin is $6,000. This means that the current fair market value (FMV) of bitcoin is lower than Michael’s original cost basis ($16,000 per BTC). There are now two different cases Damien needs to consider when selling the coins in the future:
- Case 1: Selling 0.5 BTC for $10,000. Because the price is higher than the cost basis, Damien has now realized a long-term capital gain of $2,000.
- Case 2: Selling 0.5 BTC for $6,000. Damien takes on the price at the time of transfer as the cost basis because using the original basis would result in a capital loss. Instead, Damien has now realized a capital gain of $3,000.
The important takeaway here is that you are not always allowed to claim a capital loss if you have received cryptocurrency as a gift, and the fair market value at the time of transfer is lower than the original cost basis. To learn more about how to calculate and report capital gains for cryptocurrencies, please refer to our detailed tax guide.
A cryptocurrency tax solution like Coinpanda handles cryptocurrency sent or received as gifts automatically for you. Simply tag the transaction as a gift in the software, and you are ready to export the required tax documents in a matter of minutes.
Tax on Donations
The IRS has previously published tax guidance for cryptocurrencies where they did not specifically mention tax on donations, but have now clarified this in the latest guidance released in 2019. The guidance specifically says that you will not trigger any capital gains or income tax if you donate cryptocurrency to a charitable organization.
How much deductions you are allowed depends on a few things: The original cost basis, the fair market value at the time of donating the cryptocurrency, and for how long you have owned the assets:
“Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year. If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution.”The IRS (source)
This means that you are still eligible for tax deductions even if the crypto asset has declined in value since you acquired it in the past.
Cryptocurrency Tax Software
If you don’t want to track and account for all coins you have received or sent as gifts, or donated to a charitable organization, you can use a cryptocurrency tax software like Coinpanda to do this automatically for you.
This tax solution has become very popular in a short time and is used by thousands of cryptocurrency investors to automatically keep track of all transactions. If you have received crypto as a gift, simply tag these transactions and you are ready to generate the necessary tax documents in just a few minutes. The software can import transactions from all major exchanges like Binance and Coinbase automatically, or you can add transactions manually if you prefer.
You can sign up for a 100% free account, or first read more about how the software can help you with reporting your crypto taxes. Coinpanda supports more than 65 countries today including the US, Canada, Australia, UK, and almost all other European countries.