Tax Implications of Receiving Gifted Crypto Assets

Tax Implications of Receiving Gifted Crypto Assets

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

WHAT IS A GIFT?

Per Section 102 (a) of the Tax Code, gross income does not include the value of property acquired by GIFT, bequest, devise, or inheritance.

In determining whether something is a gift, Courts look at the motivation of a donor – that is if the gift was made out of detached and disinterested generosity, then it’ll be deemed to be a gift.

WHEN CRYPTO IS GIVEN AS A GIFT.

Your cost basis in gifted crypto would be the same as the donor’s cost basis if you received the crypto during the donor’s lifetime (i.e. not an inheritance). This means that crypto received by a donee as a gift from a donor has a carry-over basis.

A quick example:

If A purchased BTC for $500 and gifts it to B, B will assume a carry over basis of $500. This is true even if BTC was 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 the gift is less than the donor's cost basis, your basis depends on whether you have a gain or loss when you dispose of the property*

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

A quick example:

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

$3,500 – $4,000 = $(500)

But what if the FMV of the gifted crypto was higher than the donor’s cost basis at the time of the gift and then was sold below the donor’s cost basis? The rule is to use the lesser of the FMV at the date of the gift or the donor’s cost basis.

A quick example:

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

$3,500 – $4,000 = $(500)

A key takeaway here is that if gifted property is sold at a loss, the donee uses lesser of the FMV of the property at the time it was gifted to them or the donor’s cost basis as their basis for calculating losses.

WHAT IF CRYPTO IS GIVEN AS A GIFT AND SOLD IN BETWEEN FMV AT THE DATE OF THE GIFT AND THE DONOR’S COST BASIS?

If at eventual disposition, the crypto asset has an “in between” basis, no income or loss needs to be recognized. This occurs when the gifted 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.

A quick example:

B receives 1 BTC as a gift from A, who has a basis of $5,000 in the BTC. At the time of the gift, the FMV of the BTC is $3,500. B eventually sells the BTC for $4,500. B will recognize neither a gain or loss on this sale. 

There would be no gain here for two reasons:

1.    For purposes of calculating a gain, the donee would use the $5,000 carryover basis, which would be greater than the sales price in this example.

2.    For the purpose of calculating a loss, the sales price would be measured against the $3,500 FMV (the lower of the asset’s value at the time the gift was received vs. the donor’s cost basis).

If you use the donor's adjusted basis for calculating a gain and get a loss, and then use the FMV for calculating a loss and have a gain, you have neither gain nor loss on the sale of the crypto asset.

OVERVIEW OF THE RULES WHEN THE FMV AT THE DATE OF THE GIFT IS LESS THAN THE DONOR’S BASIS:

1.    For property sold with gains - use adjusted basis of donor

2.    For property sold with losses - use the FMV of the property

3.    For property sold at a price between FMV and original basis - no gain or loss.

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