Cryptocurrency Is a Hot Gift Idea This Year. Here Are 5 Things You Should Think About if It’s on Your List – NextAdvisor

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Looking for a last-minute holiday gift? There’s an option that lets you sidestep supply chain shortages and potential shipping delays, and only requires a few clicks of a button: cryptocurrency.

After a year that’s seen cryptocurrency explode in popularity, you wouldn’t be the only person to buy friends and family cryptocurrency for the holidays. One in 10 people are gifting crypto this holiday season, according to a recent survey by BlockFi. 

Well-known coins like Bitcoin and Ethereum both hit record highs in November, though they have dropped in price since then. It’s become easier for everyday investors to buy digital assets through platforms like Paypal and Venmo, and trade them via apps like Robinhood and popular exchanges like Coinbase. Many of these platforms have made crypto gift giving even simpler, promoting specific features and functionality for their users.

While crypto is a popular unique gift idea this year, there are some things you should consider before giving it as a gift, experts say.

Gifting crypto is a lot like gifting a lottery ticket, for starters. “The gift could be a huge success for your loved ones or it could go to nothing,” says Grant Maddox, an independent CFP based in South Carolina.  

Then there’s the question of whether your intended recipient is even interested in crypto. Some people may not want to incorporate cryptocurrency into their portfolio, and see no value in owning it, says Chris Chen, a financial advisor with Insight Financial Strategists in Newton, Massachusetts.

But if you still decide to give crypto as a gift this holiday season, what crypto you choose to give can go a long way toward whether it has potential value to the recipient, or is more of a novelty gift. “If you’re giving a piece of Bitcoin or Ethereum, I think you’re getting closer to actually giving something of value to someone,” Chen says. “And at that point, it’s starting to resemble a gift of a share of stock or something.”

Giving or Getting Crypto As a Gift? Here’s What You Should Consider

There are thousands of cryptocurrencies, so you’re going to have to decide which you’re going to give, and how much. Bitcoin reigns supreme as the crypto of choice for gifting and receiving, with Dogecoin and Ethereum coming in as second and third, according to BlockFi’s data. But as with any new investment — whether you’re giving it or receiving it — it’s important to do your research, and understand all of the risks.

As more everyday investors wonder how cryptocurrency might fit into their portfolio, experts recommend sticking to Bitcoin and Ethereum, and following the 5% rule — that is, don’t contribute more than 5% of your portfolio to risky assets like crypto. It’s also recommended to treat it as a long-term investment, but you should never invest in cryptocurrency at the expense of other financial priorities, such as saving for emergencies and paying down high-interest debt.

Here’s what to consider if you’re giving crypto as a gift this holiday season, or find yourself on the receiving end of such a gift.

Volatility 

Crypto is a high-risk, high-reward investment. In other words, there’s a chance your crypto sees big value growth for years to come. But there’s just as likely a chance it loses its value entirely, leaving you with nothing but the experience. If you’re giving crypto as a gift, you might want to make sure the recipient understands these risks of owning and investing in cryptocurrency. 

Just take a look at Bitcoin: It reached an all-time high of over $68,000 in November 2021 after starting the year at just under $30,000. Meanwhile, Ethereum has shot up from about $737 to around $4,000, depending on the day. And it isn’t unusual for either of them to lose 15% of their value in an afternoon.

While volatility can be a big downside to gifting crypto, it can equally be an upside depending on your perception of crypto, says Chen. “If you got Bitcoin, it could go through the roof or through the floor. There are people out there who say that Bitcoin is the future of Bitcoin and Bitcoin is going to take over. And if that’s the case, then the value horizons for Bitcoin are infinite.”

Tax Implications

As long as you’re giving less than $15,000 worth of crypto, it falls under the 2021 gift tax allowance. That means you won’t have to worry about any tax implications that come with the gift. 

“If you give me any crypto that is $15,000 or less, there’s no tax implications,” says Chen. “If you give me crypto that is worth $30,000, then the difference between 15,000 and 30,000 is taxable as a gift, and is taxable to you as the person who’s giving it.” 

Despite the gift tax allowance, recipients may have to pay taxes on their crypto in the future. It depends on the crypto’s capital gains or losses when the gift recipient sells or transfers it — basically, how much value their holdings gained or lost in a given period. That’s because the IRS treats virtual cryptocurrencies like “property” for tax purposes, similar to other assets like stocks or gold. 

So if you receive crypto as a gift, you may still owe taxes on it even if you sell it immediately after it’s been given to you, depending on whether it’s increased or decreased in value.

If your crypto gains value over time, you’d experience a capital gain when you sell or transfer it. The amount of time you own it plays a role in how much you’ll owe in taxes, too. Any crypto held for less than a year is a short-term gain. If you own it for more than a year, it’s a long-term gain. These differences can affect which tax rate is applied. The tax rate also varies based on your overall taxable income, and there are limits to how much you may deduct in capital losses if your crypto asset loses value.

Of course, there is a bright side to owing taxes related to crypto. “If you have to pay taxes, that means that you have made money,” says Chen.

The opposite of a capital gain is a capital loss. If your losses exceed your gains, you can deduct up to $3,000 from your taxable income (for individual filers).  

If you are a DIY tax filer, refer to the Form 8949 to reconcile your capital gains and losses, and then report them on your Form 1040 tax return using Schedule D. There’s additional information and tools on the IRS’ website to help you determine your crypto-related tax liability, and how to report it on its website. 

Keeping a detailed transaction history will come in handy come tax season, whether you file your own taxes or work with a tax pro. As a new and evolving asset class, expect lots of changes to how crypto is regulated in the coming years, and seek out tax professionals who have experience and familiarity with digital assets for an even smoother filing process.

Purchase Process

Once you decide to give cryptocurrency as a gift, you’ll need to figure out how you’re actually going to send it. While cryptocurrency has been a popular gift this year, many people lack information on how to actually do it, according to BlockFi’s data. 

Two common ways to give crypto are through gift cards that can be redeemed for crypto or sending it directly to someone via an exchange from one crypto wallet to another. If you already have a crypto exchange you like, that might be the best place to start since it comes with the benefit of first-person experience that can be shared with your recipient.

But both the gift giver and the recipient will need a crypto wallet or exchange account to complete the transaction, which can be a little more complicated. If you’re giving crypto to someone who doesn’t already have an account or wallet, they’ll need to set one up to receive the gift. 

Crypto gift cards involve third-parties that can increase the complexity for both the recipient and the sender. Whatever route you go, take care to understand and share what will be needed of your recipient to successfully receive the gift. 

Transaction Costs

Fees are another thing to consider, which are often charged per transaction, and can differ whether you’re the seller or the buyer. There are many different fees depending on which currencies you trade, so it’s important to understand exactly how and when an exchange can  charge you for your crypto transactions.

Coinbase doesn’t charge for transferring crypto from one Coinbase wallet to another, for example. But the recipient will be charged a fee if they sell or move their gifted crypto off of the Coinbase platform, which could eat into the value of the gift. “The transaction costs are pretty high in general,” says Chen. 

Limited Knowledge or Interest

Crypto has been popular this year, but plenty of people still have no interest or limited knowledge of it. If you’re sending cryptocurrency to someone who has never owned the digital currency, you may want to consider whether they will be interested, or if it could just end up unclaimed as is the case with so many gift cards that ultimately go unused. 

“There’s nothing wrong with giving or receiving crypto,” says Chen. “You just need to be clear as to what you can do with it.”

Source: https://time.com/nextadvisor/investing/cryptocurrency/cryptocurrency-as-a-gift/