Tax Rules When Selling Cryptocurrency That Was Received as a Gift or Inheritance

Tax Rules When Selling Cryptocurrency That Was Received as a Gift or Inheritance

Receiving cryptocurrency as a gift or inheritance can be really exciting! Especially if the value has skyrocketed since the giver first bought it. But before you rush to sell it all and book a trip around the world, it’s important to understand the tax implications.

I want to walk you through the key tax rules and planning strategies, so you can make informed decisions and avoid any nasty surprises when tax time rolls around.

Cryptocurrency Received as a Gift

Let’s start with the scenario where someone gives you cryptocurrency as a gift. This could be for a special occasion like a birthday or wedding, or just because they want to share some of their crypto wealth with you!

The first thing to know is that you as the recipient do not owe any taxes or report anything to the IRS when you receive cryptocurrency as a gift. The giver is responsible for reporting the gift if it exceeds the annual gift tax exclusion amount, which is $16,000 for 2023.

So you don’t have to worry about any tax paperwork or payments when you first receive the crypto gift. The fun begins when you decide to sell or spend some of it!

Calculating Cost Basis

Your cost basis in gifted cryptocurrency is the same as the giver’s cost basis. This means if they paid $5,000 for 1 BTC and gifted it to you when it was worth $20,000, your cost basis is $5,000.

The giver should provide you with documentation showing their original purchase price. This is critical for accurately calculating your capital gains.

Reporting Capital Gains

When you sell cryptocurrency that was received as a gift, you’ll owe capital gains taxes on any appreciation in value from the time it was gifted to you.

For example:

• Giver’s cost basis: $5,000
• Value when gifted to you: $20,000
• You sell it for $30,000

Your capital gain is $30,000 – $20,000 = $10,000.

This $10,000 gain gets reported on your tax return in the year you sell and is subject to long-term capital gains rates if you held it over 12 months.

The Gift Tax Exclusion

One thing to note is that the annual gift tax exclusion applies to cryptocurrency too. This means the giver can give up to $16,000 in crypto to as many people as they want each year without having to file a gift tax return.

If the gift exceeds $16,000 in value, the giver must file Form 709 and the amount over $16,000 counts against their lifetime gift and estate tax exclusion. But you as the recipient still don’t owe anything.

Cryptocurrency Received as Inheritance

Now let’s talk about receiving cryptocurrency as part of an inheritance when someone passes away. This situation is a bit different than a gift.

Step-Up in Cost Basis

The biggest difference is that with an inherited cryptocurrency, you get a step-up in basis to the value on the date of death. This eliminates any built-in capital gains the deceased had.

For example, if the person you inherited from paid $5,000 originally for 1 BTC now worth $50,000, your new cost basis is the full $50,000. If you sold it immediately, you would have zero capital gain.

Filing the Estate Tax Return

Estates worth more than $12.92 million in 2023 are subject to federal estate taxes. This threshold also applies to cryptocurrency assets.

So if the estate includes a large amount of crypto, the executor will need to file Form 706 and pay any applicable estate taxes. As the inheritor, you don’t have to do anything here.

Reporting Capital Gains

If you sell the inherited cryptocurrency later on, you’ll only owe capital gains taxes on any appreciation from the date of death value. Our example:

• Value at time inherited: $50,000
• You sell for $70,000

Your capital gain is $70,000 – $50,000 = $20,000

One planning tip is to sell soon after inheriting to minimize gains. But you may want to hold if you expect the value to continue rising substantially.

How to Calculate Cost Basis

As we’ve seen, calculating your cost basis is crucial for reporting capital gains accurately. Here are some tips:

• For gifts, get documentation from the giver showing their original purchase price.
• For inheritances, use the value on the date of death.
• If the original purchase records are unavailable, you can use the value on the date the gift was given.
• If inheriting, the estate executor should provide you with date of death values.
• Keep detailed records of your receipt and sale transactions.

Tax Planning Strategies

To minimize your tax bill when selling gifted or inherited cryptocurrency, here are some planning strategies:

Look at Your Tax Bracket

If you expect to be in a lower tax bracket in the future, you may want to wait to sell in order to pay the lower long-term capital gains rate. For example, you may be in a high bracket now if selling a business, but expect to be retired and in a lower bracket later on.

Offset Gains With Losses

If you have realized losses in your crypto portfolio, consider selling some of those to offset the capital gains from selling your gifted/inherited crypto. This can help reduce your net gains for tax purposes.

Donate Appreciated Crypto

You can donate appreciated cryptocurrency directly to a qualifying charity. This allows you to avoid capital gains tax and claim a charitable deduction for the full current value.

Gift to Family

Gifting some of your inherited cryptocurrency to family members can move it out of your estate. Just remember to file a gift tax return if giving over $16,000 to any one person.

Use an IRA

You may be able to transfer inherited IRA assets “in kind” to your own Inherited IRA tax-free. However, there are strict rules around IRA beneficiaries and distributions, so consult a professional.

Common Questions

What if I only receive the cash value of cryptocurrency rather than the actual coins?

Sometimes you may just receive the cash equivalent rather than the cryptocurrency itself. Your cost basis is still the same as the giver’s or the date of death value. Report the sale as you would if receiving the actual coins.

What if I’m not sure of the giver’s cost basis?

Try your best to get documentation from the giver. If unavailable, you can use the value on the date the gift was given. The IRS may prefer this method over reporting zero cost basis.

Do I need to get appraisals for inherited cryptocurrency?

An estate executor will need to get date of death values from an accredited appraiser. As the inheritor, you can use the amount determined by the estate. Get a copy of Form 8949 for your records.

What if I’m still holding the crypto when I die?

Your heirs will receive a step-up in basis like you did. They’ll use the value on your date of death when calculating their capital gains.

The Bottom Line

Receiving cryptocurrency as a gift or inheritance can be an amazing windfall. But make sure you understand the tax implications before spending or selling those coins.

With proper planning and record keeping, you can minimize capital gains taxes and retain more of your crypto fortune. Just be sure to report accurately, stay organized, and consult a tax pro if you need guidance.

And enjoy those gains – just make sure Uncle Sam gets his piece!