How to Give Crypto as a Gift: Tax Rules

Cryptocurrency, often referred to simply as crypto, represents digital assets recorded on a decentralized ledger known as a blockchain. These digital assets operate without reliance on a central authority, such as a government or bank, for their maintenance or validation. Over time, cryptocurrency has evolved from a niche technology to a recognized form of property, prompting increasing interest in how it can be transferred, including as a gift. Understanding the mechanics of gifting these digital assets and their associated tax implications is important for both the giver and the recipient.

Understanding the Gifting Process

Transferring cryptocurrency as a gift involves a series of precise steps, typically initiated from a personal digital wallet or a cryptocurrency exchange account. The process begins with the giver accessing their chosen platform and selecting the specific cryptocurrency they intend to transfer. Next, the giver must accurately input the recipient’s public wallet address, which acts as the unique destination for the digital assets. Specifying the exact amount of cryptocurrency to be sent ensures the intended value is transferred.

Upon initiating the transfer, the transaction is broadcast to the cryptocurrency network, awaiting validation by network participants. This validation process involves including the transaction in a “block” that is then added to the blockchain. Transaction fees, often referred to as “gas fees” on some networks, are paid by the sender to incentivize network validators and prioritize the transaction’s inclusion in a block. These fees can vary widely depending on network congestion and the specific cryptocurrency being transferred.

The time it takes for a transaction to be confirmed and finalized varies across different cryptocurrency networks. Multiple confirmations are often required for a transaction to be considered fully secure. Once a transaction is confirmed and recorded on the blockchain, it is generally irreversible, emphasizing accuracy throughout the transfer process.

Tax Implications for the Giver

When gifting cryptocurrency, the giver is responsible for gift tax implications. For the 2024 tax year, an individual can gift up to $18,000 per recipient without federal gift tax reporting. This annual exclusion applies on a per-person basis, allowing a giver to extend this amount to multiple individuals within the same calendar year without requiring formal reporting to the IRS.

If a cryptocurrency gift to a single recipient exceeds the $18,000 annual exclusion in 2024, the giver must report the gift to the IRS by filing Form 709. The excess amount above the annual exclusion reduces the giver’s lifetime gift tax exemption. For 2024, the lifetime exemption is $13.61 million per individual. Federal gift tax becomes payable only if the cumulative total of taxable gifts made over an individual’s lifetime surpasses this exemption.

Regarding capital gains and losses, gifting cryptocurrency directly does not trigger a taxable event for the giver. However, if the giver first sells cryptocurrency for fiat currency and then uses those proceeds to make a cash gift, that sale is a taxable event, potentially resulting in a capital gain or loss. Maintaining meticulous records of the cryptocurrency’s acquisition, value at the time of gifting, and recipient details is paramount for compliance and potential future audits.

Tax Implications for the Recipient

For the individual receiving a cryptocurrency gift, the immediate tax implications are generally straightforward. Receiving cryptocurrency as a gift is typically not considered a taxable event for the recipient at the time of receipt. This means the recipient does not owe income tax on the value of the gifted cryptocurrency.

Tax implications for the recipient arise when they sell, exchange, or dispose of the gifted cryptocurrency. The recipient must determine their cost basis to calculate capital gains or losses. The “carryover basis” rule applies to gifted property: the recipient’s cost basis is typically the same as the giver’s original cost basis.

The holding period for the recipient includes the time the giver held the cryptocurrency. This “tacked-on” holding period influences whether future capital gains are short-term or long-term. Long-term capital gains are often taxed at more favorable rates than short-term capital gains. If the fair market value of the gifted cryptocurrency at the time of the gift is less than the giver’s basis, specific rules apply to determine the recipient’s basis for calculating gain or loss.

Preparing for the Transfer

Before initiating a cryptocurrency gift, several steps are important. Confirm the recipient has a compatible and secure cryptocurrency wallet set up and understands how to access and manage it. Wallets can range from “hot wallets” which are online and convenient, to “cold wallets” which are offline and offer enhanced security. Ensure the recipient is comfortable with the chosen wallet type and its security features for safe receipt.

Verifying the recipient’s wallet address is a crucial step that cannot be overstated. Cryptocurrency transactions are irreversible once processed on the blockchain. Double-checking the address, perhaps by sending a small test transaction first, can prevent permanent loss. Open communication with the recipient beforehand is also beneficial, allowing them to prepare for receiving and managing the digital assets, and to understand the responsibilities that come with cryptocurrency ownership, such as securing private keys.

Record-keeping is important for both the giver and recipient, especially for tax purposes. The giver should document:
The exact date of the transfer
The type and quantity of cryptocurrency gifted
Its fair market value in U.S. dollars at the time of the gift
The recipient’s identity
The transaction ID generated by the blockchain

The giver should also provide the recipient with their original cost basis and the acquisition date of the gifted cryptocurrency, as this information is necessary for the recipient’s future tax calculations.