If I Send Crypto to a Friend, Is It Taxable?

Sending cryptocurrency to a friend might seem like a simple transaction, but tax implications can arise depending on the amount and purpose of the transfer. The IRS treats crypto as property, meaning gifts or payments involving digital assets are subject to different tax rules.

Understanding how these transfers are classified and what responsibilities both the sender and recipient have is crucial to avoiding unexpected tax issues.

Gift Tax Classification

Cryptocurrency is considered property by the IRS, so gifts of crypto fall under federal gift tax rules. A gift is any transfer where the giver does not receive something of equal value in return. If you send crypto to a friend without expecting repayment or services, it is classified as a gift rather than income or a sale.

For 2024, the annual gift tax exclusion is $18,000 per recipient. You can give up to this amount in crypto to a single person within a year without triggering tax reporting requirements. If the total value exceeds this threshold, the excess must be reported to the IRS using Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. However, this does not necessarily mean taxes are owed immediately, as the lifetime gift and estate tax exemption—set at $13.61 million for 2024—allows most individuals to avoid paying gift tax unless their cumulative lifetime gifts exceed this amount.

The IRS requires gifts to be reported based on their fair market value at the time of transfer. Since crypto prices fluctuate, the value is determined using the exchange rate at the moment of the transaction. If the transfer occurs through a platform that provides historical pricing, this can serve as documentation. Otherwise, using a reputable exchange’s price at the time of transfer is necessary to establish an accurate valuation.

Sender’s Obligations

When gifting cryptocurrency, the sender must document the fair market value at the time of transfer. This is especially important if the crypto was originally acquired at a much lower price, as the recipient’s future tax liability depends on the sender’s cost basis. If the original purchase price is not documented, it can create complications when the recipient eventually sells the asset.

The sender should maintain records of the transaction, including the date, amount, and recipient details. If cumulative gifts exceed the annual exclusion, filing Form 709 is necessary, though no immediate tax payment is required unless the lifetime exemption is surpassed. Failing to report gifts above the exclusion can lead to penalties or audits.

Gifting cryptocurrency can also be a strategy for estate planning. High-net-worth individuals sometimes transfer appreciating assets like crypto to reduce the taxable value of their estate. By gifting assets while values are relatively low, they can minimize future estate tax liabilities. However, gifting large amounts too quickly can accelerate the use of the lifetime exemption, potentially leading to estate tax exposure later.

Recipient’s Obligations

Receiving cryptocurrency as a gift does not create an immediate tax liability, but future transactions involving the asset can have tax consequences. If the recipient sells, trades, or uses the crypto for a purchase, they must calculate capital gains or losses based on the sender’s original cost basis. The recipient effectively inherits the sender’s purchase price, which can significantly impact potential taxes owed.

If the crypto has appreciated since the sender acquired it, selling it for a profit will result in capital gains tax. The holding period also carries over from the sender, meaning if the original owner held it for over a year, any gains would be taxed at long-term capital gains rates, which are lower than short-term rates. Conversely, if the recipient sells at a loss, they may be able to use that loss to offset other capital gains or deduct up to $3,000 per year against ordinary income.

If the sender’s cost basis is unknown, the IRS allows the recipient to use the fair market value at the time of receipt, but this typically applies only when determining losses, not gains. Without proper records, the IRS may require the recipient to assume a cost basis of zero, maximizing taxable gains upon sale. To avoid complications, recipients should obtain documentation from the sender whenever possible.

Records of Transfers

Maintaining accurate records of cryptocurrency transfers is necessary for tax compliance. While crypto transactions are permanently recorded on a blockchain, this alone is not sufficient for tax reporting. The IRS requires supporting documentation that includes details beyond just the transaction hash, such as the purpose of the transfer, the identities of the sender and recipient, and the valuation method used at the time of the transfer.

To create a clear audit trail, individuals should retain screenshots or confirmations from the exchange or wallet used for the transfer. These records should include the date, time, and exact amount of cryptocurrency sent, as well as the fair market value in U.S. dollars at that moment. If the transfer occurs between private wallets rather than an exchange, additional documentation, such as email correspondence or a written agreement, may be necessary to clarify the intent of the transaction. This is particularly important for large transfers, as the IRS may scrutinize them to determine whether they qualify as gifts or payments for goods and services.