Welcome to our third installment of Crypto FAQs. For our third round, we’ll look at some of our most frequently asked questions about cost basis, missing access, and how gifting crypto works. This post will answer:
- Can I change my cost basis reporting method at any time?
- What if I lost access to a wallet or exchange and can’t provide the required data?
- What if I am trading assets on behalf of someone else? How do I handle this?
- Can I gift cryptocurrency? How do I do that?
Crypto FAQ: Can I change my cost basis reporting method at any time?
Answer: There are no regulations in place that stop you from changing cost basis reporting methods. As a best practice, you’ll want to use Specific Identification to help you secure the most advantageous tax lot ID method. However, in the case that you do not have the correct data reporting on Specific Identification, you’ll have to use a first-in, first-out (FIFO) cost basis. Further, if you do change your reporting method you need to make sure you’re not “double counting” certain lots of assets twice.
Crypto FAQ: What if I lost access to a wallet or exchange and can’t provide the required data?
Answer: One of the trickiest aspects of owning cryptocurrency is finding a secure way to store it. Unfortunately, if you no longer have access to your wallet or exchange and you cannot provide the required data, there are specific rules that you have to follow in order to realize a tax benefit from this.
There are two common ways to attempt to recover lost cryptocurrency coins. First, you can try to extract your data from the hard drive using data recovery software. You can also attempt to use some sort of a crypto hunter service to recover the lost or stolen keys, but you’ll likely have to give them a cut of your holdings as compensation.
Crypto FAQ: What if I am trading assets on behalf of someone else? How do I handle this?
Answer: Maybe you have a friend or family member who is extremely knowledgeable about cryptocurrency and you want them to trade assets on your behalf. While this is legal, know that the individual who is trading the cryptocurrency is ultimately liable for the transactions and tax reporting obligations. Rather than having a friend or family make trades on your behalf, it’s best to educate yourself on the basics of cryptocurrency investments so you understand how to purchase assets on your own.
Crypto FAQ: Can I gift cryptocurrency? How do I do that?
Answer: The short answer to whether or not you can gift cryptocurrency is yes. It’s important to note that if you receive cryptocurrency as a gift, you must sell, exchange or dispose of the cryptocurrency before you recognize any income. When you are ready to sell, your basis differs based on whether you have a gain or loss when you dispose of it. When determining if you have a gain, your basis is equal to the donor’s basis in addition to gift taxes present when the donor paid the gift. For losses, your basis is equivalent to either the fair market value of the currency when you received the gift or the lesser of the donor’s basis gift.
When it comes to determining the holding period for the currency that you received as a gift, it includes the time that the individual held onto the currency before gifting it to you. In the case that there is not any documentation that validates the holding period, your new holding period begins on the day after you received the gift.
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