Crypto currency transfer from one person to another

[dmcnulty13]

This year two friends of mine and I bought crypto currency under one friend's coin base account.  We agree to buy "X" amount and we each split the cost 3 ways.  We gave that friend the money and he purchased the crypto.  In April, that crypto took off in value and we decided it would be best if we transferred our stake to our own individual accounts so we could manage it how we choose.   We completed that transfer and everything was fine.  

Now he is telling me he is liable for taxes on the full amount and that I need to send him money to pay my share of the taxes.  Based on the research I have done, his understanding is incorrect.  I do not think he is trying to screw me over, but I do think he is not understanding his tax implications correctly.  Who is correct here?  I need some help.  

[JohnB5677 · Accepted solution]

Your friend is correct.  It is in his account, and he will owe any taxes due on the currency if he sells, trades, exchanges, or pays for anything.  If he was only transferring between his own wallets he would have no tax, but he is transferring to your wallet which is a taxable event.  He is basically paying off the debt he owes to you.

You will now have a basis equal to the value that you received it at. Somebody had to pay tax on that increase in value. 

You will not owe tax on it until you sell, trade, exchange, or pay for something.  

[dmcnulty13]

Thank you for the clarification.  Is a 35% tax rate accurate for a transfer like this?  Also, it sounds like I am going to get taxed twice on this investment, once on the transfer and again when I sell or trade it?  

[RaifH]

The tax rate depends on the length of time the cryptocurrency was held and your friend's income for the year. A 35% rate can be correct if the asset was held one year or less and your friend's gross income falls within the 35% bracket for his filing status.

Say you each put in $1,000 and the value skyrockets to $30,000. The transfer of your share is a taxable transaction for your friend and they owe taxes on the $9,000 gain from your share when you divvy up the cryptocurrency and collects the tax on that gain from you. He then transfers your share, which is worth $10,000 at the date of transfer. The transfer to you itself is not taxed. 

Now, your cost basis for this cryptocurrency is $10,000 and your acquisition date is the date of the transfer. If you sell it a year or less from your acquisition date, then you will realize a short-term gain or loss based on your cost of $10,000. If you hold it longer than a year and realize a gain, your gain will be taxed at the preferential capital gains rate. It will still be calculated based on a $10,000 cost for the cryptocurrency when you received it in your wallet, not the $1,000 that you initially put in.