Does receiving cryptocurrency as a gift create taxable income?

The gift receipt rule

Section 102 excludes the value of property acquired by gift from gross income. That exclusion does not cover income generated by the property or a gift of income from property.

Federal tax guidance treats convertible virtual currency as property. Convertible virtual currency has an equivalent value in real currency or acts as a substitute for real currency.

A later sale or exchange

A later disposition can produce gain when the amount realized exceeds adjusted gain basis, or loss when adjusted loss basis exceeds the amount realized. Sale or exchange gain or loss is recognized unless another applicable provision provides otherwise.

For convertible virtual currency, the character generally depends on whether it is a capital asset in your hands. Capital asset holdings generally produce capital gain or loss, while noncapital holdings generally produce ordinary gain or loss.

The donor's basis and the value at the gift

For gifts governed by Section 1015(a), gain basis generally carries over from the donor or the last preceding owner who did not acquire the property by gift, with applicable adjustments for the period before the gift.

Loss basis follows that adjusted carryover basis unless it exceeds fair market value when the gift was made. In that case, gift date fair market value is the loss basis.

Section 1015(d) permits only a limited basis increase for gift tax paid. For gifts governed by Section 1015(d)(6), the increase is the paid gift tax attributable proportionately to net appreciation, subject to statutory caps.

The increase cannot exceed the gift tax paid or raise basis above gift date fair market value. Net appreciation means gift date fair market value minus the donor's adjusted basis immediately before the gift.

Transfers described in Section 1041(a) instead use Section 1041(b)(2).

If donor basis facts are unknown, Section 1015(a) directs the IRS to seek them from the donor, a preceding owner or another informed person.

If obtaining those facts is impossible, the IRS determines basis using fair market value at the donor's or preceding owner's acquisition date or approximate acquisition date, based on available information.

The donor's separate gift tax question

Federal gift tax rules apply to transfers of digital assets, including cryptocurrencies, stablecoins and NFTs. For these purposes, digital assets are digital representations of value recorded on a cryptographically secured distributed ledger or similar technology.

For federal gift tax valuation, use fair market value on the date the gift is made. That value does not replace the recipient's income tax basis.

The donor is responsible for gift tax when tax is payable. If the donor does not pay, the recipient may have to pay.

For U.S. citizen or resident donors, a required gift tax return does not necessarily mean tax is payable. Applicable credit can cover taxable gifts, and prior use of that credit matters.

Two related terms

Fair market value is the price at which property would change hands between a willing buyer and willing seller, neither compelled to transact and both reasonably informed about relevant facts.

Annual gift tax exclusion excludes qualifying gifts from taxable gifts, aggregating gifts from one donor to one recipient during the calendar year. Future interests do not qualify, and this exclusion is separate from the recipient's income exclusion.

An investor perspective on cryptocurrency

A participant described approaching cryptocurrency through risk management. Consider your own investment questions alongside the tax questions raised by a gift.

"We are a cryptocurrency and blockchain technology investment company. We plan on applying risk management to take out some of the bumps in the road."

Frequently asked questions