How Do Gift and Estate Taxes Apply to Cryptocurrency?

 Posted on June 24, 2022 in Taxation Law

Cryptocurrencies such as Bitcoin and Ethereum have become more and more popular in recent years, and they are now widely used for multiple purposes. Some employers may pay employees in virtual currency, and these currencies may be used to purchase goods or services. Cryptocurrency can also represent a valuable investment, and as the value of different virtual currencies increase, they may be sold or transferred, allowing investors to earn significant profits. For those who have invested in cryptocurrency, it is important to understand the tax implications, including the gift taxes or estate taxes that may apply to certain types of transfers.

Taxes Issues Affecting Cryptocurrency Gifts and Donations

The IRS treats cryptocurrency as property, meaning that when it is sold or transferred to another party, capital gains taxes will apply to the gains or losses. For example, if cryptocurrency were valued at $1,000 when a person originally acquired it and it was worth $2,000 when it was sold or exchanged to someone else, this would be considered a gain of $1,000, and the person would be required to pay capital gains tax on this amount.

When giving cryptocurrency to someone else, gains or losses usually will not need to be recognized. However, gift taxes may apply depending on the value of the cryptocurrency at the time of the gift. The gift tax exclusion amount for 2022 is $16,000, so no gift taxes will apply if the value of cryptocurrency given to a single person within the 2022 tax year is below $16,000. If the amount of a gift exceeds this limit, the person giving the gift will be required to pay gift taxes on any amounts above $16,000.

Cryptocurrency owners may also be able to realize tax advantages by making charitable donations. When donating virtual currency, a person can take an income tax deduction for the market value of the currency at the time of the donation. This can be advantageous in situations where the value of cryptocurrency increased significantly since it was acquired.

Virtual Currency and Estate Taxes

Cryptocurrency owners will also need to be aware of certain tax issues when they leave these assets to heirs following their death. In some cases, estate taxes may apply. The estate tax exemption in 2022 is $12.06 million for a single person or $24.12 million for a married couple. Estate taxes will only apply if the value of a person’s estate exceeds this amount. In addition, cryptocurrency transferred to heirs will usually be treated with a step-up basis, meaning that a beneficiary’s tax basis will be the value of the cryptocurrency at the time of the person’s death. This can help avoid capital gains taxes if cryptocurrency increased in value since it was originally acquired.

Contact Our San Jose, CA Tax Attorney for Cryptocurrency

If you have questions about how you can minimize the taxes that will apply to virtual currency that you own, please reach out to John D. Teter Law Offices. We will advise you on the steps you can take to protect your financial interests, including in cases where you plan to give cryptocurrency to others or leave these assets to your loved ones. Contact our San Jose tax lawyer at 408-866-1810 to schedule a consultation.

Sources:

https://www.irs.gov/pub/irs-drop/n-14-21.pdf

https://www.forbes.com/sites/robertwood/2021/08/02/three-tax-free-crypto-transfers/

https://thehustle.co/death-bitcoin-and-taxes-a-guide-to-post-life-crypto/