The gift of cryptocurrency is growing in popularity. It can be used to introduce a friend or family member to the crypto space. It’s tax-free if the gift is less than $16,000 in 2022 or $17,000 in 2023.
Remember that cryptocurrency is a risky investment and that prices can fluctuate. High-risk investments like crypto should be limited in your portfolio. The same goes for financial gifts. If your recipient is not familiar with crypto, it’s best to gift Bitcoin and Ethereum.
There are many ways to give digital coins and tokens.
Send money to an exchange
Difficulty: Easy.
Cost: Low.
The easiest way to transfer digital assets is through an exchange. You can buy crypto through a crypto exchange if you don’t have any crypto.
To receive the funds, your recipient will need an account. You can ask them for their wallet address. This can look like a QR code, which is a barcode that you can scan with your smartphone camera. Or a string of numbers and letters you will need to enter when using the “Send” feature of your exchange. Choose the currency you wish to transfer and the amount.
Use a peer-to-peer money transfer app
Difficulty: Easy.
Cost: Medium.
To send crypto, you will need to complete additional identity verification steps and provide a linked payment method. If your recipient has an existing crypto wallet, you can use these apps to send crypto. Although fees vary, they are generally more expensive than wallet transfers or crypto exchanges.
Make a paper wallet
Difficulty: Easy.
Cost: Low.
Because they are meant to be used once and can be handed to others, paper wallets make it easy to gift crypto. This is the best way to send smaller amounts of crypto. However, it is not the most secure method to transfer funds. The location of crypto on the blockchain is shown in paper wallets. Anyone with paper wallets can view it. Paper wallets can also be destroyed easily.
You can download a paper wallet generator for free on platforms like BitAddress.org or WalletGenerator.net to generate a printable document that contains a unique combination of public and private keys. These QR codes will link to the addresses and allow for simple transfer. You can scan the QR code of the crypto exchange’s mobile app and then follow the steps to send a payment to the address on your paper wallet.
For special occasions, paper wallets can be given with a card and can be used as a tangible form of digital currency. The funds can be transferred to a hardware or software wallet by scanning the QR code. Or the paper can be kept safe.
Use a cryptocurrency gifting service
Difficulty: Easy.
High to medium.
A gift service specifically designed for cryptocurrency can increase the sentimental value and sentiment of a crypto transfer. There are many options, such as the Robinhood Crypto Gifting Program and EarlyBird Crypto. These services allow families to gift crypto to their children using a UGMA Custodial Account, which is a tax-advantaged account that allows them to give cash or securities to minors.
Robinhood Crypto Gifting Program allows you to send funds without commission via a link that has a tracking function. You won’t be charged if your gift is not accepted within 14 days.
EarlyBird allows you to create a video message that goes with each gift, and to add milestone moments for your child to the platform. A financial literacy newsletter is also included in the service.
Create your own software wallet
Difficulty: Medium.
Cost: Low.
Although this method is more time-consuming, you will need to install software in order to create a wallet for transfer. First, download a desktop or mobile wallet to create a wallet. Next, follow these steps to create an account.
Copying the recovery phrase or seed that your wallet generates is the most important step. It will appear as a collection of 12 to 24 random words. These are necessary to recover wallet funds or transfer them elsewhere. You must include the seed phrase with all other wallet information.
Once you have created the seed phrase, you can send the desired amount of crypto directly to your wallet address. Many software wallets offer features that allow you to purchase crypto from your wallet, or transfer it from an exchange or other wallet.
To recover funds from the wallet, all you need is the seed phrase. You can also write instructions for your recipient to download the same software wallet that you created. Once they have entered the seed phrase they will be able to access the funds from their device.
Buy a Hardware Wallet
Difficulty: High.
Price: High to medium.
Although they can be more difficult to use, hardware wallets make great gifts because they can be wrapped. Because they are not easily accessible online, hardware wallets can be more secure.
You will need to buy a hardware wallet from a company in order to gift a wallet. Some wallets are also available at Walmart and Best Buy. You’ll need to follow these instructions once it arrives to set it up, and then download the software.
It’s important to write down your 12- and 24-word seed phrase, just like you would with a software wallet.
You can connect your device or smartphone to add crypto to your hardware wallet. Some devices can plug into your computer using a USB cord, while others connect wirelessly via QR code and WiFi. The majority of the accompanying wallet software allows you to buy crypto directly or send it to your wallet address via another exchange or wallet.
After funds have been added to your wallet, wrap it up and give it along with the seed phrase information. Some wallet companies offer steel cards that can be personalized with a seed phrase to elevate the gift.
Tip
Hardware wallets can look similar to flash drives, while others are card-shaped and sometimes market as cryptocurrency gift cards. You should only purchase a cryptocurrency gift card from a trusted, verified provider with a good reputation. There are scammers out there selling Bitcoin gift cards.
How is crypto gift taxed?
Gifts made with cryptocurrency are treated the same as other monetary gifts. They work in the same way as gifting stocks or bonds. There is no gift tax on crypto gifts under a certain amount.
Inflation adjusts the amount that is eligible for a gift tax exemption each year. For 2022 gifts, it was $16,000. It will increase to $17,000 for 2023 gifts. Gifts less than this amount are not tax-deductible unless the recipient sells the asset.
You will need to file Form 709, a Gift Tax Return or Form 708, if you are giving crypto beyond the exemption amount. You will need to file a gift tax return or Form 709 if you’re giving crypto over the exemption amount. This also includes small gifts that increase the total amount ($16,000 in 2022). Crypto is a relatively new asset and can fluctuate in value. It’s important to properly document your gift, especially if you’re giving it to someone special. Include a letter to the recipient describing the gift recipients, the amount and the purpose.
Jordan Bass, a tax attorney and founder of Taxing Cryptocurrency, a tax service that assists clients with crypto accounting, said, “It is especially important with crypto to ensure you record your right value of the asset.” It should be understood that the gift is a gift and not a loan or payment for services. ”
Bass has witnessed clients give large sums of crypto to their parents in order to pay off their mortgages and help them retire. If a client gives crypto to a child that will be held for a long period and may increase in value, keeping a record of the gift is important so that tax consequences are avoided.
The editor and author were not involved in any of the above investments at the time that the article was published.