Hello all,
I am a US citizen currently living in the US and my father who isn’t a US citizen and lives abroad plans to send me crypto as a gift.
We are exploring stable coins such as USDT and USDC.
From my understanding when I sell the gifted crypto I would need to know my father’s cost basis of the gifted asset. That’s how I would calculate my realized gains/losses for tax purposes. Theoretically, when using USDT or USDC the cost basis should remain unchanged since the price of these assets should remain unchanged. Or at least that’s the goal.
My question is - what kind of proof/documentation would the IRS need from me to prove my father’s cost basis? The goal is to not report/incur any capital gains/losses. In all the documents I have come across it’s simply stated that I should “know” the gifter’s cost basis.
Thanks in advance!
It depends. You might first want to review this IRS website regarding gift basis (which determines how much gain/loss you report): IRS cost basis. Per the website, your father's cost basis really would only come into play if, at the time he gifted you the coins, they had lost value from when he purchased them originally. If that happens, your gains would be based off of your father's purchase price of the coin, and loss would be determined by the fair market value of the coin when you received the gift. If the coin either maintains or increases in value, your gain/loss is then determined off of your father's cost basis when purchased.
With that as a background, if your father is directly purchasing stable coin, and transferring it to you in that format, you will need to report your father's cost basis upon purchase of the coin. You do not need to submit specific proof of this basis unless the IRS asks for it (for example, in an examination or audit). However, if you do need to prove it, the easiest way is to maintain a record of the date of acquisition of the coin, and it's value at the time. This is what the IRS will use if they need proof. Although there is talk of legislation requiring crypto-exchanges to more thoroughly report activities, I would anticipate that the majority of exchanges are still not reporting on any official forms, so it is necessary to manually track your transactions. Still, with a stable coin, you are correct that you should not see significant movement, and therefore very little if any capital gains or losses. But you will still need to report the activity via Forms 8949 and Schedule D, so it is still important to track your transactions.
If your father purchases another type of coin, however, and you wish to transfer that coin into a stable coin, this is a separate transaction that very well could result in gain or loss, and would need to be reported separately and in addition to any further sales of the stable coin. (In this scenario, the value of the stable coin is your purchase price after having exchanged the prior coin).
@Opus 17 Thank you for the clarification, and I have modified response as a result
[Edited 12/6/21 6:41 PST]
It depends. You might first want to review this IRS website regarding gift basis (which determines how much gain/loss you report): IRS cost basis. Per the website, your father's cost basis really would only come into play if, at the time he gifted you the coins, they had lost value from when he purchased them originally. If that happens, your gains would be based off of your father's purchase price of the coin, and loss would be determined by the fair market value of the coin when you received the gift. If the coin either maintains or increases in value, your gain/loss is then determined off of your father's cost basis when purchased.
With that as a background, if your father is directly purchasing stable coin, and transferring it to you in that format, you will need to report your father's cost basis upon purchase of the coin. You do not need to submit specific proof of this basis unless the IRS asks for it (for example, in an examination or audit). However, if you do need to prove it, the easiest way is to maintain a record of the date of acquisition of the coin, and it's value at the time. This is what the IRS will use if they need proof. Although there is talk of legislation requiring crypto-exchanges to more thoroughly report activities, I would anticipate that the majority of exchanges are still not reporting on any official forms, so it is necessary to manually track your transactions. Still, with a stable coin, you are correct that you should not see significant movement, and therefore very little if any capital gains or losses. But you will still need to report the activity via Forms 8949 and Schedule D, so it is still important to track your transactions.
If your father purchases another type of coin, however, and you wish to transfer that coin into a stable coin, this is a separate transaction that very well could result in gain or loss, and would need to be reported separately and in addition to any further sales of the stable coin. (In this scenario, the value of the stable coin is your purchase price after having exchanged the prior coin).
@Opus 17 Thank you for the clarification, and I have modified response as a result
[Edited 12/6/21 6:41 PST]
I believe you have basis rules backwards. If the property has increased in value, the recipient’s cost basis is the same as the giver’s cost basis. The recipient does not get a stepped up value equal to fair market value on the date of the gift.
[Edited to add: when I wrote this, I understood the question to be that the father owned one type of cryptocurrency and the son or daughter was going to convert it to a tethered currency after the gift. That would create a capital gain transaction. However, if the father is going to purchase the tether directly, the paragraph below does not apply to this taxpayer.]
I believe you are also incorrect with respect to the transfer of the cryptocurrency from its current form to a “stablecoin”. Each time cryptocurrency is converted, it is treated as a gain or loss at the US dollar value on that date. Even if the owner converts the current cryptocurrency to stable coin without going through US cash as an intermediary, the transaction is recorded as a capital gain or loss using the dollar value equivalent on the day of the conversion.
You are correct that you are required to know your father‘s cost basis. Cost basis is determined by the US dollar value of the transaction. If the transaction is performed with a foreign currency, the US dollar value is determined using the currency exchange rate on the day of the transaction.
If your father is going to gift you tethered currency, your cost basis will be whatever he paid for it. You should get proof from your father, such as a copy of his receipt or online transaction documentation. You must understand that if you are audited, the IRS does not have to give you credit for any basis that you cannot prove with sufficient evidence. Even though tether is theoretically a fixed price of one dollar per unit, that is not always true, and the IRS could also take the position that without proof, your father might have received it as a gift himself, or received it for free in some other fashion and so you have no basis.
For example, suppose your father lives in France and buys US$100 of tether. That would cost him €88 today. If you were to be audited, you would need to show the transaction report confirming the purchase of the tether, and you would need to show the currency exchange rate for the day of the transaction, which together would show that your father‘s cost was US$100. (His basis also includes transaction costs. If your father paid a 3% commission, the cost basis would be $103.)
I don’t know what kind of documentation is provided with cryptocurrency transfers. You just have to be aware that if you sell cryptocurrency, and you are audited, the IRS does not have to award you any cost basis that you can’t prove.
It is also unclear to me why your father is going to give you US denominated tether cryptocurrency instead of cash. The tax treatment of both gifts would be exactly the same.
In the United States, the receiver of a gift does not pay income tax. If the gift is from a foreign person and is more than $100,000, the gift must be reported to the IRS on a form 3520, even though no gift tax is owed. This applies to all gifts including property and intangible assets, so if your father gave you more than $100,000 of cryptocurrency, you must still report it, and you can be fined for failing to report. The US has money laundering laws that require banks to report money transactions of more than $10,000. If your father gives you more than $10,000 of cryptocurrency so he can avoid the reporting requirement and then you immediately convert it back to US cash, this may constitute a separate financial crime called “structuring“ even though the gift itself is perfectly legal and non-taxable. (I suppose that if the banking and financial industry of his country is insecure, you might feel that it will be safer to perform the transfer via cryptocurrency rather than a bank wire transfer. In that case, you might have a defense against the charge of “structuring“. However, I would still be cautious, and if the amount is substantial, you may wish to get professional legal advice.)
Thank you for your response. My issue here is that my father would be purchasing the cryptocurrency from other individuals (mostly family friends or other family members) and not an official exchange and so It's difficult to have a transaction track record. Perhaps an unofficial letter/agreement can be produced.
What I find strange is why I would be responsible for unrealized capital gains of a non-US citizen. For example, if my father who isn't a US citizen or resident is gifted a crypto currency at a cost basis of $0 and then gifts it to me and the FMV is $1000 at the time of the gift. The capital gains tax I would be paying is due to a capital gain not incurred by a US citizen or in the US.
@Omidmoj wrote:
Thank you for your response. My issue here is that my father would be purchasing the cryptocurrency from other individuals (mostly family friends or other family members) and not an official exchange and so It's difficult to have a transaction track record. Perhaps an unofficial letter/agreement can be produced.
What I find strange is why I would be responsible for unrealized capital gains of a non-US citizen. For example, if my father who isn't a US citizen or resident is gifted a crypto currency at a cost basis of $0 and then gifts it to me and the FMV is $1000 at the time of the gift. The capital gains tax I would be paying is due to a capital gain not incurred by a US citizen or in the US.
I'm not involved in cryptocurrency transactions but I don't quite see how your father can obtain coins from other people without having a transaction record, unless he hands them some cash and they give him the passwords to their wallets? In any case, most taxpayers are not audited. If audited, you will need to convince the examiner of your proof.
Unrealized capital gains are not taxed in the US, only when they are realized. If you are the person selling the asset, you are the person who is realizing the gain and responsible for the tax.
However, if unrealized gains are taxed in your father's country, that's an adjustment to the cost basis. For example, suppose he is gifted cryptocurrency at $0 cost basis, but your country taxes unrealized gains, and the FMV on 12/31/2020 is $800 so he pays capital gains tax on his unrealized gain. That raises his adjusted basis to $800, which basis you acquire along with the gift. Of course, if audited, you would also have to prove his adjustments to basis.