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Cryptocurrencies are no longer limited to the fintech crowd. Even those who are not tech-savvy have heard of cryptocurrencies, thanks to their volatile price swings and surges in value making headlines worldwide. Opinions on whether to invest in cryptocurrencies vary. Some experts warn that digital money like Bitcoin will never become mainstream and are overpriced, while others believe that cryptocurrencies are the future and can be a profitable investment. With an increasing number of ecommerce companies accepting digital assets as a payment method, cryptocurrencies can also make for versatile gifts.
The Best Cryptocurrency to Gift
With over 8,900 cryptocurrencies available as of October 2023, choosing the right one to gift can be challenging. Unless you or the recipient have a specific preference, it’s best to stick with mainstream, well-established options like Bitcoin, Ethereum, or Solana. While there are cheaper alternatives, their popularity and staying power remain uncertain compared to the more established coins.
Cryptocurrencies are known for their price volatility, so it’s important to approach gifting with caution. Do some research on the coins you’re interested in and assess their prospects and whether their current price reflects that. Additionally, consider the recipient’s preferences when choosing a cryptocurrency gift.
How to Gift Cryptocurrencies
Gifting cryptocurrencies has become easier due to their increasing popularity and speculative nature. Here are some common methods for gifting digital assets:
Gift Cards
Several websites offer cryptocurrency gift cards. Look for reputable sites with positive reviews and the desired cryptocurrency, select the amount you want to gift, and make the payment. Once the payment is complete, you’ll receive a gift card with the corresponding amount. The recipient can redeem the gift by visiting the same website and entering the card details.
Crypto Exchanges
Another option is gifting cryptocurrencies through an exchange. If you’re not already a crypto investor, you’ll need to choose an exchange, create an account, and select a payment method. Once set up, you can easily send the purchased digital currencies to the recipient’s wallet address.
Storing Cryptocurrencies
After purchasing the gift, it’s crucial to store it in a safe place. While holding it on the platform where it was purchased is an option, it’s advisable to move it offline to a secure location to prevent hacking and theft.
Paper Wallets
The most cost-effective offline storage method is a paper wallet. It can be as simple as writing down the key codes on a piece of paper. Alternatively, you can generate a paper wallet through websites that randomly create keys and corresponding QR codes. This method provides a printed piece of paper with the necessary information to access and transact cryptocurrencies.
Ensure that the paper wallet is stored safely to avoid damage or loss. While paper wallets are prone to damage and loss, they can serve as a temporary storage solution until the keys are transferred to a hardware wallet.
Hardware Wallets
For a more secure storage solution, hardware wallets are recommended. These small USB drive devices are waterproof, virus-proof, and considered the best way to keep private keys safe. As they are offline, they are harder to hack compared to computers or smartphones. Hardware wallets can be purchased at various prices, depending on the features they offer.
Keep in mind that Bitcoin’s value often exceeds most people’s budgets. However, you can buy fractions of a Bitcoin instead of a whole coin.
Physical Coins
For a more extravagant gift, you can purchase or create physical coins with the key printed on them. Some physical coins even use holographic stickers with the key. These coins are custom-printed using metal or plastic on a 3D printer, making them visually impressive. However, physical coins should be considered temporary or novelty storage solutions as they are less secure than other methods. Once the gift is given, the keys should be used to transfer the cryptocurrency to a cold storage medium, and the physical coin should be destroyed unless it is made of a precious metal.
Tax Implications of Cryptocurrency Gifts
Gifting cryptocurrency is usually not a taxable event unless the transfer exceeds the gift tax allowance. The Internal Revenue Service (IRS) only needs to be notified when the recipient sells the asset and realizes a capital gain or loss.
If the recipient sells the gifted cryptocurrency within one year at a profit, it is considered a short-term capital gain and taxed as ordinary income. After one year, it becomes a long-term gain, which is taxed at lower capital gains rates.
The size of the gain is determined by the amount paid by the donor. For example, if a coin was bought for $100 and sold for $500 five years later, the recipient might be taxed on the profits if they meet the other capital gains requirements.
To accurately record taxable events, it’s important to keep track of the purchase price and the value of the gift when transferring it, even if it’s only moments later. This information is crucial for calculating taxes if the recipient sells the cryptocurrency for a gain.
Capital losses work differently and can be deducted on the investor’s tax return. A capital loss is registered if the asset is sold for less than its purchase price and its fair market value when gifted. Tax filers can claim up to a $3,000 deduction for capital losses when married, while those filing separately can each deduct $1,500.
Conclusion
Gifting cryptocurrency is an excellent way to introduce someone to this new form of currency and potentially provide them with an appreciating asset. However, it’s important to ensure that the recipient understands how to access, store, and use the gift, as well as how to account for any taxable events. Providing them with usage and tax instructions can be helpful if they are new to cryptocurrencies. Cryptocurrencies offer storage solutions such as paper wallets, hardware wallets, and physical coins, each with its own level of security and convenience. Consider the recipient’s preferences and the level of security required when choosing a storage solution.
