I’ve been holding some Bitcoin for a few years, and it’s grown quite a bit in value. I’m thinking about transferring some to my adult children as a gift. I’m wondering, does this mean I can avoid paying capital gains tax since it’s a gift, or does it not work that way? Any advice would be appreciated!
Actually, gifting can be a tax strategy. Each year, you can gift up to $15,000 without tax implications. But remember, if your children sell, they’ll face the capital gains tax.
It’s not that simple. When you gift crypto, you’re transferring your cost basis to the recipient. If they sell, they’ll pay capital gains tax based on your original purchase price.
For you, the IRS allows an annual gift tax exclusion, which for 2021 was $15,000 per recipient. This means you can give up to this amount to each of your children without having to file a gift tax return. If your gift exceeds this amount, you must file Form 709 to report the gift but may not necessarily owe tax due to the lifetime estate and gift tax exemption.
For the recipient, the key point is that they inherit your cost basis in the cryptocurrency. This is the amount you originally paid for it. When they eventually sell the cryptocurrency, they will owe capital gains tax on the difference between the sale price and the inherited cost basis. If the cryptocurrency has appreciated significantly since you purchased it, they could face a substantial tax bill.
It’s also worth noting that special rules apply if the cryptocurrency is sold for less than the cost basis, which could result in a capital loss for the recipient.
In summary, gifting cryptocurrency can be a way to defer capital gains tax, but it does not eliminate it. The tax obligation is simply transferred to the recipient, who will have to deal with it when they sell the cryptocurrency. As tax laws are complex and can change, it’s always wise to consult with a tax professional to understand the current laws and how they apply to your specific situation. This ensures that both you and your gift recipients can make informed decisions and comply with all tax obligations. Remember, tax evasion is illegal, but tax avoidance through legal means, such as taking advantage of gift tax exclusions, is perfectly legitimate. Always keep thorough records of all transactions to substantiate your tax filings.
To add to the above, it’s crucial to keep records. If the IRS questions the gift, you’ll need to prove the transaction and the value of the crypto at the time of the gift. Always consult with a tax professional for personalized advice.