Last Updated: January 19, 2023
In this post (part 4 of 6), we will take a deep dive into what’s covered under the “send” category of the crypto question on Schedule 1 and outline common transactions. Sending cryptocurrencies (transfers between wallets/exchanges/platforms you own, donations & gifts) are generally non-taxable. Although these are non-taxable, these transactions would require you to check “yes” on crypto question on Schedule 1. For those of you who are still wondering why you have to answer the “crypto question” when you file for taxes, check out why the IRS included it here.
- Sending cryptocurrencies between wallets, exchanges, DeFi and other platforms owned by you - Q37 addresses cryptocurrency transfers. As long as you are transferring to/from wallets, exchanges or other addresses which belong to you, it will not trigger any taxes, irrespective of the price differences when you move the funds. The key here is that all destinations are owned by you. It should be highlighted that you may get a Form 1099-K when you transfer funds between two exchange accounts owned by you. This might lead you to believe that you have to report something on your tax return. However, technically, you do not have to fill out any special tax forms indicating that those transactions are non-taxable transfers. Therefore, this would most likely trigger a CP2000 tax notice. (These notices are automatically generated by the IRS system when it sees a mismatch between what’s reported on Form 1099-K and what’s reported on your tax return). In such cases, you would have to follow the instructions on CP2000 tax notice and explain to the IRS that transactions in questions are mere transfers and should not be taxed.
- Sending cryptocurrencies to a charity (Donations) - Q33 - Q36 directly address cryptocurrency charitable donations. Since cryptocurrencies are treated as property per IRS Notice 2014-21, IRS is applying rules applicable to non-cash donations to cryptocurrency donations. The deduction you can report on Schedule A Line 12 depends on how long you have kept the cryptocurrency for. If you donate a cryptocurrency which you held for more than a year, you would be able to deduct the fair market value (FMV) at the time of the donation. If you donate a cryptocurrency which you held for less than a year, you would be able to deduct the lesser of FMV or the cost basis at the time of the donation. For example, you acquired 1 BTC for $20,000 on December 15th, 2017. On January 1st, 2020, the price per BTC is $6,000. If you donate this BTC to a charity on January 1st, 2020, you would only get a deduction equivalent to $6,000. This is a bad outcome for you because you are losing $14,000 ($20,000 - $6,000) worth of economic value and a tax benefit. Therefore, in order to maximize your tax benefits, it is a wise idea to donate long-term cryptocurrencies that have a FMV above their cost basis. On another instance, assume you would want to donate 1 BTC acquired on January 5th, 2019 for $6,000. On December 25th, 2019, 1 BTC is priced at $7,000. In this case, you would be eligible for a deduction of $6,000 (lower of cost basis or FMV). In such situations, it is beneficial for you to hold it for more than 12 months so you can be eligible for a higher deduction. Special Note: If you are reporting crypto donations over $5,000 on your tax return, you would have to get a qualified appraisal and complete Section B of Form 8283 as applicable.
- Gifting cryptocurrencies - Q30 - Q32 address rules applicable to cryptocurrency gifts. Note that these rules resemble general rules applicable to property so there are no surprises here. The main takeaway is that sending (or receiving) cryptocurrencies as a gift is not a taxable event. However, what’s extremely important here is tracking the basis. There are two scenarios: gifting crypto when FMV is higher than cost basis & gifting crypto when FMV is lower than cost basis. In the former case, the recipient will take on the cost basis of the donor. No taxes for any parties involved. In the latter case, the recipient's basis depends on whether he/she has a gain at the time he/she sells the gift. This means that you will NOT be able to figure out the basis at the time you receive a gift; you have to wait until you sell it. Let’s use an example to analyze possible scenarios. Let's say that Jennet buys 1 BTC for $1,000. Two years later she gives it to Jon when the price of BTC is $500. Ten days later Jon sells the bitcoin at the following price points:
- $1,100: Jon takes on Jennet’s original basis of $1,000, and has a long-term capital gain of $100
- $400: Since there is a capital loss using Jennet’s basis, he can not use donor’s original cost basis of $1,000. Instead, he takes on the FMV at the time of transfer as basis ($500), leaving a long-term capital loss of $100
- $900: (selling price between donor’s cost basis and the FMV at the time of the gift). Jon will not recognize any capital gains or losses.
As you can see, the “send” category has either no or immediate tax implications. If you have transactions that fall under this category, what’s extremely important is keeping a good record of basis as it would affect so many future calculations. In the case of donations, the IRS reaffirmed this by adding Q35 and Q36 on December 2019 to the originally issued 43 FAQs on October 9th, 2019. Overall, all these “send” transactions would require you to check yes on Crypto question on Schedule 1. However, you may not have to pay any taxes immediately because these are non-taxable events. The next post will analyze what’s included under “exchange” category of cryptocurrency question.
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Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.