Making this thumbnail may have gotten slightly out of hand, but it's safe to say that I had some fun with it.
I am a certified public accountant (not an artist) that is based out of New Jersey, and I'm continuing my extensive guide covering the interactions of United States tax law and cryptocurrency. You can see links to previous parts on the bottom of the post.
Note: gifts are one of the more complex areas of tax law, and treatment can vary significantly. The below is a general overview.
What is considered a gift?
A gift is any transfer of money or property where full consideration is not received in return.
You purchasing coffee for a friend is a gift, just like receiving a present on Christmas is.
This broad definition means that almost every single taxpayer interacts with gift tax laws multiple times a year.
Who has to pay gift tax?
Gift taxes are almost always paid by the donor, the recipient doesn't have to think about the tax consequences unless they end up selling their gift.
When are gifts 'taxable'?
Any gift is a a taxable gift, unless it falls under any of the following exclusion:
- Gifts that are less than or equal to the annual exclusion for the year.
- Gifts that cover tuition or medical expenses.
- Gifts to your spouse.
- Gifts to a political organization.
Gifts to charities are also excluded from gift tax laws, and the value of the gift is deductible.
What is the annual exclusion?
The annual exclusion is an amount that changes as times goes on. For tax years 2018, 2019, 2020, and 2021, that amount is $15,000.
This exclusion means that a donor may gift up to $15,000 per person before they have to file Form 709.
This annual exclusion is why the gift tax is rarely relevant for most tax payers. Unless you gift $15,000 of money or property to one person in a year, you will never have to file the gift tax form.
I gifted more than the annual exclusion to one person. Now what?
If you end up gifting money or property worth more than $15,000, you'll have to file Form 709 where you describe the details of the gift.
The amount over the $15,000 annual exclusion is then applied to your lifetime limit, which is $11,580,000 in 2020.
This lifetime exclusion means that even people that do have to file a gift tax form are generally not required to pay any tax on the gift.
Does the donee have any filing requirements?
Generally: no. A donee does not have to do anything for receiving a gift.
However, when a donee receives property, they should know the original cost basis of the asset, and the date that it was purchased if it's something they may eventually sell or exchange, like cryptocurrency.
What is the donee's adjusted basis? What about the holding period?
The adjusted basis changes depending on whether your have a gain or loss.
- If you will have a gain: your basis is equal to the donor's basis (generally the purchase price)
- If you will have a loss: your basis is the lesser of:
- the donor's basis
- the fair market value when received
This treatment maximizes your gain, and minimizes your loss.
If you aren't able to substantiate the donor's basis, then your basis will be 0.
The holding period of the property will include the time it was held by the donor.
What happens when a donee sells a gift?
Let's pretend a husband and wife purchase a car for $20,000. The model becomes sought after by collectors of vintage sports cars. They decide to move, and give the to car to the child, when the fair market value is $100,000.
The husband and wife would file Form 709, as the fair market value of the gift is greater than $15,000. They would apply the difference, $85,000, to their lifetime exclusion.
The child decides to sell the car five years later, for $125,000. The child would record a long-term capital gain of $105,000.
Are there any special rules about cryptocurrency?
As far as I can tell, cryptocurrency doesn't have any specific rules related to gift taxes.
The main concern when it comes to the gift tax is a need for proper documentation. If you plan to gift cryptocurrency, you should make sure the recipient knows your basis and purchase date. This is especially true as it is more than likely the case that they will convert it into another crypto or fiat currency, creating a taxable event.
A couple of random things
This is just some random information about gift taxes that may or may not be relevant to you:
- The US tax laws for international gift giving are the same. You can send and receive gifts to and from foreign people following the same rules as if they were a United States citizen. Although, foreign people generally do not have filing requirements in the United States. If you receive a gift from a foreign person, you may have to file Form 3520 (> $100,000).
- Having property inherited is far better than having property gifted. When property is inherited through an estate, the adjusted basis for the recipient becomes the fair market value at the time the property is received. This provides you with a tax free 'step-up' which could save the recipient a lot of money on taxes if they do decide to sell.
Hopefully you were able to get a grasp of how gift tax rules work in the United States. Ultimately, only the very wealthy manage to 'suffer' the consequences of the gift tax law. The main concern, as it always is with cryptocurrency, is to retain proper documentation to ensure you know the value of what you're gifting, and what you're receiving.
If you have any questions, feel free to ask them below. They can relate to the items above or about anything else that is tax related.
This material, and any responses below, have been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investment, or accounting advice. You should consult your own tax, legal, investment, or accounting advisors before engaging in any transaction.
Useful IRS Resources:
US Tax Law and Cryptocurrency: