The idea of giving or receiving cryptocurrency as a gift would have been unheard of two years ago. Now, this is completely normal. One in 10 people gave cryptocurrency as a gift this past holiday season, according to a recent survey by BlockFi.
Popular currencies like Bitcoin and Ethereum hit record highs in November, although their prices have since fallen. It has become easier for casual investors to buy digital assets through platforms like Paypal and Venmo, and trade them via apps like Robinhood and popular exchanges like Coinbase. Many of these platforms have made crypto gift more simple, enhancing specific features and functions for their users.
But there are a few things you should consider if you give or receive cryptocurrency as a gift in 2021, experts say.
Like taxes for starters. Bitcoin and other virtual cryptocurrencies are classified as “property” and are taxed like other common assets such as gold or stocks. So you may need to pay taxes in 2022 on any cryptocurrency granted to you in the last year if you made a profit from selling it. Simply giving someone cryptocurrency is not a taxable event, unless you exceed the gift tax allowance of $15,000.
Gifting cryptocurrencies is a lot like gifting a lottery ticket. “A gift may be a hit for a loved one or it may go for nothing,” says Grant Maddox, an independent health care center based in South Carolina.
Then there is the issue of interest in cryptocurrencies. Some people may not want to incorporate cryptocurrencies into their portfolio, and see no value in owning them, says Chris Chen, a financial advisor with Insight Financial Strategists in Newton, Massachusetts.
But what crypto you choose to give in the future or given in the past can go a long way toward whether it has potential value to the recipient, or is more of a new gift.
“If you are giving away a piece of Bitcoin or Ethereum, I think you are getting closer to giving something of value to someone,” says Chen. “And at that point, it started to look like a gift of a share of stock or something.”
What to consider if you give or receive crypto as a gift in 2021
Bitcoin ranks as the preferred cryptocurrency for gifting and receiving, with Dogecoin and Ethereum taking second and third place, according to BlockFi data. But as with any new investment – whether you are making or receiving it – it is important to do your research and understand all the risks.
As more and more everyday investors question the suitability of cryptocurrency in their portfolio, experts recommend sticking to Bitcoin and Ethereum, and following the 5% rule – that is, don’t contribute more than 5% of your portfolio to risky assets like crypto. It is also advisable to treat it as a long-term investment, but you should never invest in cryptocurrency at the expense of other financial priorities, such as saving for emergencies and paying off high-interest debt.
Here’s what to consider if you gave cryptocurrency as a gift last year, or found yourself on the receiving end of such a gift.
As long as you gave less than $15,000 in cryptocurrency, it falls under the gift tax allowance for 2021. This means that you don’t have to worry about any tax implications that come with the gift.
“If you give me any cryptocurrency worth $15,000 or less, there will be no tax implications,” says Chen. “If you give me $30,000 worth of cryptocurrency, the difference between 15,000 and 30,000 is taxable as a gift, as is taxable as the person giving it.”
Although gifts are tax-exempt, recipients may have to pay taxes on their cryptocurrency in the future — even if you sell them immediately after they are given to you. It depends on the capital gains or losses of the cryptocurrency when the gift recipient sells or transfers it – basically, how much value his or her property has gained or lost in a given period.
If your crypto gains value over time, you will get a capital gain when you sell it or transfer it. The amount of time you have plays a role in how much you’ll owe in taxes, too. Any cryptocurrency that is held for less than a year is a short-term gain. If you’ve owned it for more than a year, that’s a long-term gain. These differences can affect the applicable tax rate. The tax rate also varies based on your total taxable income, and there are limits to how much you can deduct in capital losses if your crypto assets lose value.
Of course, there is a silver lining to paying taxes related to cryptocurrency. “If you have to pay taxes, it means you made money,” says Chen.
The opposite of capital gain is capital loss. If your losses exceed your gains, you can deduct up to $3,000 from your taxable income (for individual files).
If you are a DIY tax registrar, return to Form 8949 to adjust your capital gains and losses, then report them on your tax return on Form 1040 using Schedule D. There is additional information and tools on the IRS website to help you determine cryptocurrency-related tax liability, and how to report it on their website.
Keeping a detailed transaction history will come in handy in tax season, whether you file your own taxes or work with a tax professional.
As a new and evolving asset class, anticipate a lot of changes in how crypto is regulated in the coming years, and look for tax professionals with experience and knowledge of digital assets for a smoother registration process.
Crypto is a high risk and high return investment. In other words, there is a possibility that your cryptocurrency will see significant growth in value for years to come. But there is a similar possibility that it will completely lose its value, leaving you with nothing but experiment. If you are giving cryptocurrency as a gift, you may want to make sure that the recipient understands the risks of owning and investing in cryptocurrency.
Just look at Bitcoin: it reached an all-time high of over $68,000 in November 2021 after starting the year with less than $30,000. Meanwhile, the price of Ethereum has gone from around $737 to around $4,000, depending on the day. It is not unusual for either of them to lose 15% of their value in the afternoon.
While volatility can be a huge downside to cryptocurrency grants, it can also be an upside depending on your perception of cryptocurrencies, says Chen. “If you get Bitcoin, it could go through the ceiling or through the floor. There are people who say that Bitcoin is the future of Bitcoin and Bitcoin will take over. And if that is the case, Bitcon’s value prospects are infinite.”
If you decide to give cryptocurrency as a gift in the future, you will need to know how you will actually send it. Although cryptocurrency was a popular gift last year, many people lack information on how to actually do it, according to BlockFi data.
Two popular ways to give cryptocurrency are through gift cards which can be exchanged for cryptocurrency or sent directly to someone via an exchange from one crypto wallet to another. If you already have a crypto exchange that you want, this might be the best place to start as it comes with a first person experience feature that can be shared with the recipient.
But both the gift giver and the recipient will need a crypto wallet or exchange account to complete the transaction, which can be more complicated. If you are giving crypto to someone who does not already have an account or wallet, they will need to set up an account to receive the gift.
Crypto gift cards include third parties that can increase the complexity for both the recipient and the sender. Whatever route you take, be sure to understand and share what is required of the recipient to successfully receive a gift.
Fees are another thing to consider, they are often charged per transaction, and can vary whether you are the seller or the buyer. There are many different fees depending on the currencies you are trading, so it is important to understand exactly how and when an exchange can charge you for your crypto transactions.
Coinbase does not charge a fee for transferring crypto from one Coinbase wallet to another, for example. But the recipient will be charged a fee if they sell or transfer their gifted cryptocurrency from Coinbase, which could erode the value of the gift. “Transaction costs are generally very high,” says Chen.
Limited knowledge or interest
Cryptocurrency became hugely popular in 2021, but many people still don’t care about it or have limited knowledge of it. If you acquire cryptocurrency, consider whether you want to sell it immediately or keep it as a long-term investment — and how that might play into your taxes this year. “There is nothing wrong with giving or receiving cryptocurrency,” says Chen. “You just need to be clear about what you can do with it.”