Key IRS treatment and why it matters

The IRS treats cryptocurrency as property (IRS Notice 2014-21 and current guidance on virtual currencies), not currency. That classification drives the tax rules when you give crypto away: the act of gifting itself is generally not a taxable sale for federal income tax purposes, but it can trigger gift-tax reporting and it fixes how the recipient will calculate capital gains or losses when they later sell or exchange the asset.

Source authority: IRS Notice 2014-21; see IRS guidance on virtual currencies (irs.gov/cryptocurrency).

How basis and holding period work after a crypto gift

  • Donor’s income tax: Donors generally do not recognize capital gain when they give property as a gift. The gift is a non-recognition event for income tax (unlike a sale).
  • Recipient’s basis for gain: The recipient typically takes the donor’s adjusted basis (cost basis) for determining gain when they later sell. Holding period also generally tacks on to the recipient, so short- or long-term status usually carries over.
  • Recipient’s basis for loss: If the fair market value (FMV) of the gift at the date of gift is less than the donor’s basis, special dual-basis rules apply: the recipient’s basis for determining a loss may be the FMV at the date of gift, while the basis for determining a gain remains the donor’s basis. These rules come from general tax principles applied to gifts of property; consult IRS publications or a tax advisor for complex cases.

Practical implication: If you bought Bitcoin at $2,000 and gift it when FMV is $50,000, the recipient’s basis for later gain is $2,000. If the recipient sells at $60,000, their taxable gain will be $58,000.

Gift tax vs. income tax — different rules

  • Gift tax (donor-level): The federal gift tax system applies to transfers of property by gift. Each year the IRS sets an annual gift-tax exclusion amount (indexed for inflation). Gifts up to the annual exclusion per recipient do not require the donor to file a gift tax return (Form 709) or to use any of the donor’s lifetime exemption. If a single gift to one recipient in a year exceeds the annual exclusion, the donor must file Form 709 even if no tax is due because the amount can be applied against the donor’s lifetime estate & gift tax exemption.
  • Income tax: As noted, making a gift does not produce an immediate capital gain for the donor. The recipient may owe capital gains tax when they sell based on the carried-over basis.

Authority: IRS gift tax guidance and Form 709 instructions (see IRS Gift Tax pages and Form 709 guidance).

Note on current amounts: Annual exclusion and lifetime exemption amounts are adjusted periodically. (For example: $15,000 in 2021; $16,000 in 2022; $17,000 in 2023; $18,000 for 2024.) Check the IRS gift tax page for the most recent figures before acting.

Reporting and compliance steps — a checklist

  1. Record the date and FMV at the time of the transfer. Use exchange price data from reputable exchanges or an average-of-exchanges approach if you transact across platforms.
  2. Keep original purchase records showing the donor’s cost basis, purchase dates, and any fees. These are essential because basis usually carries over to the recipient.
  3. If the total gift to any recipient in a calendar year exceeds the annual exclusion, file Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return). Filing is required even when no tax is immediately due.
  4. If the recipient later sells the crypto, they report gain or loss on Schedule D/Form 8949 using the donor’s basis and the recipient’s holding period.
  5. For gifts to charities, different rules can apply; generally, donating appreciated crypto held more than one year to a qualified charity allows a deduction equal to FMV and avoids capital gains tax on the appreciation.

Interlink: For help with reporting and forms, see our guide “Cryptocurrency Tax Reporting: Basics and Best Practices.”

(Internal link: Cryptocurrency Tax Reporting: Basics and Best Practices — https://finhelp.io/glossary/cryptocurrency-tax-reporting-basics-and-best-practices/)

Common scenarios and worked examples

Example 1 — Parent gifting to child

  • Parent bought 1 BTC for $3,000 years ago; FMV at gift date = $40,000.
  • Parent makes a gift of the full coin to the child.
  • Income tax: Parent does not recognize gain when gifting.
  • Gift tax/reporting: If the gift exceeds the annual exclusion for that year, the parent must file Form 709. The excess reduces the parent’s remaining lifetime exemption.
  • Child’s tax when selling: Child’s basis = $3,000; if child later sells at $45,000, taxable gain = $42,000 (subject to short/long-term rates depending on holding period).

Example 2 — Gifting during a loss

  • Donor bought ETH for $5,000; FMV at gift date = $4,000.
  • Recipient’s basis for gain remains $5,000; for loss the recipient may use $4,000 (the FMV at gift) to determine a deductible loss if they sell at a loss; this dual-basis treatment prevents donors from transferring built-in losses to create an immediate tax benefit.

Example 3 — Gifting to a charity

  • Donor holds appreciated crypto for more than one year and gifts it directly to a qualified charity.
  • Tax effect: Donor may be entitled to a charitable contribution deduction equal to the FMV of the asset (subject to AGI limits) and avoids recognizing capital gain on the appreciation. This is often the most tax-efficient way to give appreciated crypto to charity.

See our guide “Tax-Smart Cryptocurrency Donations to Charity” for details and requirements for qualified charities.

(Internal link: Tax-Smart Cryptocurrency Donations to Charity — https://finhelp.io/glossary/tax-smart-cryptocurrency-donations-to-charity/)

Practical strategies and professional tips

  • Keep meticulous records: Track acquisition dates, amounts, purchase costs, transfer fees, and FMV sources. Good recordkeeping is the most common difference between a clean tax filing and an IRS notice. See our recordkeeping best practices article for crypto.

(Internal link: Cryptocurrency Recordkeeping Best Practices for Tax Reporting — https://finhelp.io/glossary/cryptocurrency-recordkeeping-best-practices-for-tax-reporting/)

  • Consider timing: If you want the recipient to inherit a low basis (because you expect crypto will fall), consider waiting until after a market correction. Conversely, gifting when your basis is low locks in a low basis for the recipient and preserves unrealized gains in their hands.

  • Use annual exclusions strategically: For large transfers, splitting gifts across years or using both spouses’ exclusions (if applicable) can reduce or eliminate the need to tap lifetime exemptions.

  • Direct donations to charity: When your goal is philanthropic, donating crypto directly to a qualified charity is often more tax-efficient than first selling and then donating cash.

  • Discuss custodial and custody transitions: Some recipients—especially minors—will receive crypto into custodial accounts or wallets that create legal and tax complications. Coordinate transfers with an attorney or financial advisor to ensure titles and control are handled properly.

Common mistakes to avoid

  • Assuming gifts never have tax consequences. Gifts can create gift-tax reporting obligations and significantly affect the recipient’s future tax bill.
  • Failing to document provenance and basis. Without proof of the donor’s basis, the recipient may face greater tax risk when selling.
  • Moving crypto through exchanges that don’t maintain long-term records; that complicates FMV and basis reconstruction.

State tax considerations

Most states follow federal rules for income tax computation, but state estate, inheritance, or gift taxes vary. A few states have their own estate/gift tax regimes or decoupled rules; check state law or consult a tax planner in your state.

When to involve a professional

If the value is material, the recipient is a charity, or transfers are part of an estate plan, involve a CPA or tax attorney. In my practice I often prepare Form 709 filings, calculate how transfers interact with the lifetime exemption, and coordinate charitable transfers to ensure documentation qualifies for the charitable deduction.

Resources and authoritative references

  • IRS Notice 2014-21 (virtual currencies) and IRS virtual currency guidance — irs.gov/cryptocurrency
  • IRS gift tax information and Form 709 instructions — see IRS gift tax pages (irs.gov)
  • For general capital gains rules, see IRS Publication 551 and Form 8949 instructions.

Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice. Rules change and amounts such as the annual gift exclusion and lifetime exemption are adjusted periodically. For transactions that could affect your tax bill materially, consult a qualified CPA, tax attorney, or financial planner who understands cryptocurrency.

If you want, I can add downloadable checklists for gifting (what records to collect, sample Form 709 scenarios) or a short decision flowchart to help decide whether to gift, sell-and-gift, or donate appreciated crypto.