Soft forks are protocol changes to a blockchain (ETH to ETH 2.0 when The Merge occurs, for example) that remain compatible with previous versions and therefore do not create a taxable event. No new cryptocurrency is created in a soft fork. For now, just remember soft forks are not taxable, and we dive into the topic in much greater detail in the hard forks section of this book. Hard forks may or may not be taxable depending upon whether there is an accession to wealth. Receiving new cryptocurrency is an accession to wealth and is taxable; however, a hard fork that does not result in the transfer or airdrop of new cryptocurrency does not create taxable income.

When you inherit crypto assets, as defined by the IRS, you inherit property. The cost basis of the property is the FMV (average of the high and low for the day) at the time of death or six months later if the value of the assets has dropped and the alternate valuation date is elected. This election is only made when estate tax is due in order to lower the estate tax, which results in a lower cost basis and potentially higher capital gains tax upon disposition.

At the federal level, if estate tax applies (the 2022 estate tax exemption is $12.06 million), it is paid by the estate and no taxable gain or loss results to the inheritor. Regardless of how long the property was held by the decedent, it is treated with favorable LTCG tax rates upon disposition. Half a dozen states have an inheritance tax (not to be confused with estate tax) while a dozen states and Washington D.C. have estate taxes, with Maryland being the only state with both an inheritance and estate tax. While this book does not expand on the topic of state taxes or estate planning, some may consider putting crypto assets in a trust and ensuring the trustee has access so they do not go undiscovered after the taxpayer dies.

The IRS’s FAQ sums up the rules for receiving crypto as a gift:
“If you receive virtual currency as a bona fide gift, you will not recognize income until you sell, exchange, or otherwise dispose of that virtual currency. See Publication 559. Your basis in virtual currency received as a bona fide gift differs depending on whether you will have a gain or a loss when you sell or dispose of it. For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero. Your holding period in virtual currency received as a gift includes the time that the virtual currency was held by the person from whom you received the gift. However, if you do not have documentation substantiating that person’s holding period, then your holding period begins the day after you receive the gift.”

IRS Publication 559 is designed to help those in charge (personal representatives) of the property (estate) of an individual who has died (decedent). It shows them how to complete and file federal income tax returns and explains their responsibility to pay any taxes due on behalf of the decedent.

When a U.S. person receives gifts from foreigners, the gifts are not taxable; however, taxpayers may be subject to reporting requirements that come with hefty penalties if certain forms are not filed in a timely manner. When a U.S. person receives gifts from a foreign person, estate, or related-parties, the taxpayer may be required to aggregate such gifts, and if they exceed $100,000 alone or in aggregate, they must file IRS Form 3520 and may be required to file FinCEN Form 114 (FBAR) or Form 8938 (much more on these later).

Gifting crypto assets to individuals generally will not have any tax implications unless you are super-rich; the inflation-adjusted lifetime exemption for federal gift tax (aka “death tax”) is $12.06 million per individual and $24.12 million per married couple in 2022. If you are receiving this much crypto as a gift, you should speak with an estate planning attorney. For the rest of us, gifts of more than the 2022 annual exclusion amount of $16,000 per individual and $32,000 per married couple create a reporting requirement with no financial impact. IRS Form 709 is used to disclose excess beyond the annual exclusion to the IRS, which is applied to your lifetime exclusion.

For example, Brandon and Kendra are married and agreed to split a gift of BTC valued at $100,000 to their son Bentley in 2021. Bentley does not have a reporting requirement; however, Brandon and Kendra each have to file a separate Form 709 showing $35,000 ($50,000 gift, less $15,000 exclusion) toward their lifetime exclusion amounts. The FMV of Bentley’s BTC is established on the date of the gift, but Bentley inherits his parents’ holding period and tax basis. If Brandon and Kendra bought the BTC for $10,000 more than a year before gifting it, Bentley has an unrealized LTCG of $90,000. Because cryptocurrency is property (not currency), if Bentley immediately disposed of the BTC for $100,000 upon receipt, he would have to recognize a taxable gain of $90,000 upon sale. For this reason, it would have been much better for Bentley to have received fiat currency (USD) than property (BTC). Had Bentley received $100,000 in cash he would never owe tax, but on the disposition of the crypto asset (BTC) he pays tax on the disposal of a capital asset.

Note also that Brandon and Kendra could jointly give $30,000 as a gift to an unlimited number of individuals and there would be no reporting requirement; as spouses, they can give unlimited gifts to each other (note that there is an annual exclusion limit of $164,000 in 2022 for spouses who are not U.S. citizens).

If Brandon and Kendra decide instead to donate BTC valued at $100,000 to a charity under IRC Section 501(c)(3) or other eligible organization described in Section 170(c), let’s say Bentley University, cryptocurrency being treated as property instead of currency may be beneficial. Where the couple bought the BTC for $10,000 as property with a LTCG, they won’t have to recognize the $90,000 gain and may be able to deduct the entire gift. Generally, individual taxpayers who donate cryptocurrency and itemize the deduction on line 12 of Schedule A (Form 1040) can deduct property subject to capital gains in full up to 30 percent of their Adjusted Gross Income (AGI). This means that if Brandon and Kendra’s AGI is $333,333 or more, they just knocked their taxable income down by $100,000 through donating BTC they paid $10,000 for. Depending upon their overall taxable income, this action could save them anywhere from $15,000 to $23,800 in capital gains tax at the federal level (and more when you consider state taxes). If their AGI is less than $333,333, they can carry over the suspended charitable contributions to future tax years.

Remember, the FMV of the crypto asset is determined on the date of the gift. Also note that cash donations and other non-capital gains property (cryptocurrency held for a year or less, for example) may be deducted in full up to 50 percent of their AGI to the extent of the lesser of the cost basis or FMV. For Brandon and Kendra this would only amount to a reduction in AGI of $5,000, so holding period is paramount. These tax rules vary by tax year and percentages vary by type of charitable organization and the source of funds (i.e., originating from an IRA for someone over 70 ½ for example), so be sure to do your due diligence when planning gifts. Publication 526 explains how to claim a deduction for charitable contributions.

It discusses:
– Organizations qualified to receive contributions
– The types of contributions you can deduct
– How much you can deduct
– What records to keep
– How to report contributions

Borrowing crypto assets is no different than borrowing from a traditional lender. The IRS does not consider a loan to be taxable income because it must be repaid. On the other hand, if a crypto loan with an initial USD value of over $600 is forgiven, you should receive a 1099-C for cancellation of debt (COD) income, which is taxable. If the loan provider requires an exchange of crypto for you to get the loan — for example, swapping ETH for cETH to get a loan in Compound (referring to https://compound.finance/) — a conservative approach would be to report the gain or loss, if any, that results from that transaction.

Transfers among commonly owned accounts (wallets/ addresses/ exchanges) are non-taxable events. For example, you may move your MATIC from Crypto.com to Binance Earn to get a better yield for staking it. A transfer such as this could trigger a reporting requirement for an exchange or other platform that results in the issuance of an “information return.” An information return, such as a 1099-K for example, is sent to the IRS and to you, but it would not cause a taxable event if it arose solely as the result of a transfer. Note that in the example of moving MATIC from Crypto.com to Binance, if you earned interest on either platform, it would be considered income and would be taxed at ordinary income tax rates.

When you buy cryptocurrencies with fiat dollars, you do not have a taxable transaction. The same can be said for buying an NFT with fiat money. Using other crypto or stablecoins to buy crypto will likely have tax consequences, as we discuss in this and future videos.

Many actions you’ll take with crypto are not taxable. Here’s a non-exhaustive list, and we’ll cover each in more detail in this course:
– Buying crypto or NFTs with fiat currency
– Transfers
– Borrowing crypto
– Gifting and donating crypto assets
– Receiving crypto as a gift
– Inheriting crypto
– Soft forks

It is not always apparent whether a transaction involving crypto assets causes a taxable event or not. The IRS has shed some light on what does not facilitate a taxable transaction with respect to virtual currency. We can take this a step further and generally apply the same tax treatment to transactions involving other forms of crypto assets, including NFTs (although there may be exceptions).

About three inches down from the top of the first page of your individual income tax return (Form 1040 pictured above), beginning in 2020, you will find a variation of the question: “At any time during (insert tax year), did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”

2022’s proposed Form 1040 language is more concise:
“At any time during 2022, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or financial interest in a digital asset)? (See instructions.)”

This message is the IRS prompting you to include your taxable crypto transactions in your tax return because Uncle Sam wants his cut. You must check either the “Yes” or “No” box as leaving it blank is not an option. This question on your 1040 also provides the breadcrumbs leading us to which crypto transactions are not taxable; deep in the form’s instructions, you find the following:

“A transaction involving virtual currency does not include the holding of virtual currency in a wallet or account, or the transfer of virtual currency from one wallet or account you own or control to another that you own or control. If your only transactions involving virtual currency during 2021 were purchases of virtual currency for real currency, including the use of real currency electronic platforms such as PayPal and Venmo, you are not required to check the “Yes” box next to the virtual currency question.”

The sole act of purchasing crypto assets at fair market value (FMV) would not require you to check “Yes” and would not cause a taxable event. Per the IRS, fair market value (FMV) is “the price that property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.” We emphasize FMV because if you purchase crypto assets for less than FMV, you are likely receiving a discount in exchange for property, goods or services. To “receive” crypto is a condition to check “Yes” on the 1040 and is a taxable event (more on this later).