“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.” - IRS FAQ on Virtual Currency Transactions (not published in the IRS Bulletin).
I Received Crypto as a Gift…
Your client received bitcoin for his birthday (a bona fide gift). No problem. As long as the client does not dispose of the crypto gift, no taxable event. We’re in the clear. Woohoo! Time to bring on those birthday celebrations (celebratory emojis).
Ahem... cough, cough. Sorry to interrupt the celebration, but you’ll need to note at least 3 things before dishing out those birthday wishes.
Firstly, you’ll need to tick “Yes” on the (very broad) virtual currency question box on their 1040 which is now prominently featured just below your client’s name and address.
Secondly, you should determine whether you should attach a statement to their return explaining why there is no transaction on the return involving crypto since you ticked “Yes” to the crypto question.
Thirdly, take note of the original basis of the donor including the related acquisition date and of course the fair market value on the day of the gift. If you don’t have any documentation to support the donor’s basis, then your basis will be zero. The basis will differ depending on whether there will be a gain or loss once your client finally disposes of the crypto as noted in the FAQ.
- Determining the gain - basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift.
- Determining the loss - 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.
Your client’s holding period will include the holding period of the donor unless of course, you do not have the documentation to substantiate it, then the holding period will begin the day after the receipt of the gift.
I Donated Crypto as a Gift…
Generally, for the donor of the crypto, the gift will be non-taxable if it's less than the annual exclusion for gift tax.
Also, based on the updated FAQ, if you donate virtual currency to a qualified charitable organization, you will not recognize income, gain, or loss from the donation.
Your related deduction will generally be equal to the fair market value of the crypto at the time of the donation if you held the crypto for more than one year. If the crypto was held less than a year, your deduction is the lesser of your basis and the fair market value at the time of the contribution.
Those Hard Forks or Airdrops Ain’t Gifts
It’s important to note that crypto received from hard forks or airdrops are not gifts (see Part 5). Yes, you may claim that you’ve received such crypto at no cost, but the intention was not a gift. Who would even be the donor for coins received from a hard fork? See the AICPA February 2020 comment letter for more on this.
With Ledgible Tax, you can tag crypto received as "gifts” to classify these items separately and avoid triggering a taxable event.
Disclaimer: This post is informational only and is not intended as tax or investment advice. For tax or investment advice, please consult a professional.