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After the newly written U.S. tax laws recently passed, cryptocurrency investors realized the tax-free exemption filing 1031 for IRS reporting is no longer applicable to their digital asset investments. The law also implies that a lot of people will have to pay taxes on every single transaction they processed throughout the past twelve months. However, there is one loophole available to cryptocurrency investors, but it involves gifting the funds to another person or charity.

Gifting Cryptocurrencies: The Only Crypto-Tax Loophole

Gifting Bitcoin Is One Way a Person Can Avoid Paying Crypto-Taxes
Robert Wood of Wood LLP.
The U.S. government is concerned about getting its taxes from American citizens who have invested in cryptocurrencies. Last year the IRS started to probe businesses that deal with digital assets like the exchange Coinbase. For the moment the tax agency is looking for individuals and groups who have spent over $20,000 using Coinbase. Following this initial probe, the San Francisco exchange has started to send customers the IRS tax form 1099-K. Additionally, investors have realized that 1031 tax-free exchanges won’t apply to digital currencies, and every transaction is also considered a taxable event.

Although, giving bitcoin as a gift is one way investors can avoid paying taxes on their cryptocurrency gains. Gifting money has to be more aligned with donating the funds as opposed to an employee bonus, and there is a fine line between the two financial events. According to Robert Wood, a tax lawyer based in San Francisco, an individual can gift up to $15,000 without documenting the transaction.

“If you give crypto to a friend or family member — to anyone really — ask how much it is worth. If the gift is worth more than $15,000, it requires you to file a gift tax return,” explains Wood.

For 2018, $15,000 is the amount of so-called “annual exclusion.” You can give gifts up to this amount each year to any number of people with no reporting required.

Gifting Bitcoin Is One Way a Person Can Avoid Paying Crypto-Taxes
Dorian Nakamoto was gifted 67 BTC ($669,000 USD) after he was accused of being Satoshi Nakamoto.
Wood details that the gift doesn’t trigger income tax requirements for both the giver and the recipient. If the recipient calculates gains or losses (cashes out) from the gift in the future, then the funds will be taxable based on the value the day the gifting happened. Wood details that documenting the gift is helpful because donating money is often written off improperly. If the donation exceeds $15K, then U.S. residents are required by law to file a ‘gift tax return.’ “For 2018, $15,000 is the amount of so-called ‘annual exclusion,’” Wood details.

Further, Wood explains that in 2018 the amount a person or married couple can give per lifetime has increased quite a bit. According to the tax attorney, a person can gift up to $11.2 million tax-free during their lifetime, and married couples can gift up to $22.4Mn. If the individual gives the money to a recognized 501(c)(3) charity, they can get an income tax deduction for the spot value of the digital asset at the time of filing.

A few years ago Dorian Nakamoto was accused of being the ‘real’ Satoshi Nakamoto, and he received thousands of dollars worth of bitcoin. If Dorian kept track of the cost bases across all the bitcoin donations, he received he may have been able to claim the contributions as tax-free gifts. However, if he treated the gifted funds as ordinary income, his gifts would face significantly higher tax rates for his gains.

What do you think about gifting people bitcoin? Do you think this is a good way to avoid paying taxes? Let us know in the comments below.
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