Thinking about giving cryptocurrency as a gift? It’s becoming a bit of a popular choice amongst crypto-lovers, but is it really the best option?
I’ll be honest, it can get a little bit tricky when it comes to taxes… But try not to let that put you off. Cryptocurrency has gone from being a digital oddity to a mainstream investment, so there’s definitely space for gifting it, as long as you remember that the rules around it are still being figured out.
Basically, gifting crypto isn’t as simple as giving cash. There are specific tax rules you need to follow in the UK, and getting it wrong can lead to some unexpected tax bills. This guide will break down the complicated stuff and make the whole thing a little easier to digest.
We’ll explain how gifting crypto works for tax purposes, what you need to report, and how to potentially lower your tax bill. By the end, you’ll know how to give crypto as a gift without any nasty surprises.
This guide covers:
- More than just digital money
- So, let’s break down the taxes
- What you need to know about tax when gifting crypto
- Is gifting crypto a good idea?
More than just digital money
Cryptocurrency isn’t like regular cash. It’s a digital asset, which means it’s treated more like a piece of property than something you can spend freely. This has big implications when it comes to taxes.
The UK government, for example, actually views cryptocurrency as a form of property. This means it’s subject to the same kind of tax rules as when you sell a house or shares. It’s important to understand this difference because it affects how much tax you might owe.
So, let’s break down the taxes:
- Capital Gains Tax (CGT): This is the most common tax you’ll come across with cryptocurrency. If you sell your crypto for more than you paid for it, you generally have to pay CGT on the profit.
- Inheritance Tax (IHT): If you own a lot of cryptocurrency and you pass away, it’s included in your estate. If the total value of your estate is over a certain amount, your heirs might have to pay Inheritance Tax.
- Income Tax: In some cases, you might need to pay Income Tax on your cryptocurrency. For example, if you earn crypto through mining or if you’re paid in crypto for a service.
Because of these tax rules, it’s super important to keep track of all your cryptocurrency transactions. This includes when you bought it, how much you paid, when you sold it, and how much you got. These records will help you calculate your taxes accurately and avoid any problems with HMRC.
To sum it up – cryptocurrency can be a complex investment so that makes it a complex gift – especially when it comes to taxes. Understanding how it’s treated by the government and keeping detailed records will help you stay on the right side of the taxman.
What you need to know about tax when gifting crypto
Why is giving away your crypto as a gift not as easy as a simple transfer? It’s to do with Capital Gains Tax like we mentioned earlier.
Capital Gains Tax (CGT)
If your crypto is worth more now than when you bought it, you might have to pay Capital Gains Tax (CGT) when you give it away. This is because giving it away is like selling it.
You need to figure out how much more your crypto is worth now compared to when you bought it. This is your profit. If you’ve made a profit and it’s over a certain amount, you’ll need to pay CGT on that profit.
Example: You bought £1,000 worth of Bitcoin and it’s now worth £3,000. If you give it away, you’ve made a profit of £2,000. You might have to pay CGT on this £2,000.
Inheritance Tax (IHT)
If you give away a lot of crypto and then die within seven years, your family might have to pay Inheritance Tax (IHT) on some or all of the crypto.
Tip: There are some ways to give away crypto without having to pay IHT, like giving tiny amounts to lots of people or giving it to your spouse. Could be worth considering.
Cutting down your crypto gift tax bill
Luckily for you, there are a few sneaky (but completely legal) ways to reduce the tax you might owe when gifting crypto:
-
- Timing your gift: Gifting crypto when its value is low can help reduce or eliminate CGT.
- Using annual exemptions: You can give away a certain amount of assets each tax year without paying CGT.
- Gifting to your spouse: Gifts between spouses are usually exempt from both CGT and IHT.
- Charitable giving: Donating crypto to charity can offer some tax benefits if you’re feeling particularly generous.
Is gifting crypto a good idea?
This depends. Gifting cryptocurrency can be a generous and rewarding gesture, as long as you understand the implications. With crypto tax rules changing so often, you need to plan carefully.
This guide offers an overview, but for more specific advice, consider joining our Crypto Tax Degens community. Gain exclusive access to expert insights from Andy Wood and ensure your crypto tax planning is on point. Don’t leave your financial future to chance—get the right guidance and stay ahead of the game.
Choose Tax Natives if you are looking for professional crypto tax services.