Transferring Cryptocurrency Without Triggering Taxes; Rob Wood Tells You How
Cryptocurrencies continue to be hot items, and many investors have seen big gains in the value of their purchases. The IRS is always looking for tax dollars from gains, so crypto investors need a way to transfer their purchases without triggering taxes. Section 1031 exchanges are no longer an option for Bitcoin owners. However, there are options, as tax lawyer Rob Wood explains in this report. He also discussed this subject in his article, “Tax-Free Ways to Transfer Bitcoin and Other Crypto: Expert Take.”
Wood says that making a gift is an obvious way to transfer cryptocurrency. A gift is not subject to income tax when the gift is made. The current law provides that up to $15,000 per person per year (the “annual exclusion”) can be transferred without even the need of reporting the gift. If the amount of the gift exceeds the $15,000 limit, you have to report it, and it counts against your lifetime tax-free transfer amount, currently $11.2 million.
Wood points out a couple of things to be aware of: First, a gift must really be a gift. For example, in a business setting, a “gift” might actually be a bonus, at least in the view of the IRS, and bonuses are treated as compensation. And, of course, the recipient of the gift will need to pay income tax on any gain when the cryptocurrency is sold.
Another option, related to making a gift, would be making a contribution to a charity. The benefit to the donor arises when the gift is an item in which the donor has a very low basis but which has a high market value. Wood says that if the recipient is a 501(c)(3) organization, the donor can claim the market value as a tax deduction and not pay taxes on the appreciation in value that has occurred.
Another possibility involves starting up an LLC or partnership. Wood says that the holder of cryptocurrency that has appreciated in value can avoid paying tax on it by starting a company to be used as a business or investment vehicle. By following the rules, an individual can form the company, contribute the cryptocurrency, and take back shares of stock or a partnership interest. “That transfer is not treated as taxable.”
The caveat Wood offers is that the holder of cryptocurrency should get some sound advice before making any of these moves. Sometimes, people make simple mistakes when making a transfer. There are a number of small things that individuals can overlook when making a transfer, and missing a step can cause a person to miss out on a tax deduction.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.