So in addition to all of the other tax consequences for Bitcoin, there are actually tax consequences for giving it away?! In some rare cases, yes. As a result, it's helpful to differentiate Bitcoin "gifts" from "tips."

As it turns out, all of those Bitcoin "tips" you see on reddit, or via email or QR code, may not be taxable as tips at all but rather as gifts. And taxpayers are exempt from paying taxes on most gifts they make - up to $14,000 per year per individual, with no limitations on gifts to spouses, political organizations, charities, students (for tuition costs) or any patient's medical expenses. The exception would be in our charitable example, where someone gifted a large sum of money to an organization or person that didn't actually qualify as an IRS-approved charity.

On top of that, the person receiving a gift is normally exempt from paying taxes on it, unless the gift is of property and the gift recipient realizes a capital gain or loss on its sale. You can probably guess that this is yet another case where that recurring complication, cost basis, rears its ugly head.

The general rule is that the gift recipient inherits the same cost basis in a gifted property as the donor. For example, if Joe received bitcoins that had been purchased at $10 each in 2012, and then later sold them at $900 in December 2013, then he would have to pay taxes on that $890 gain per bitcoin.

The complexities of this come to light in a recent real-world example, where hundreds of donors made gifts to Dorian Nakamoto, the man who was wrongly outed as the inventor of Bitcoin by Newsweek. It will be all but impossible for Nakamoto to track the disparate cost bases (price and date are equally important) of hundreds of different donations. Without any ability to prove the cost basis or holding period of his various gifts, Nakamoto will likely have to treat the entire donation as ordinary income and pay a hefty tax.

This same problem persists for anyone who receives tips from anonymous sources online, whether they be for a reddit comment, a blog post, an open-source software contribution or a birthday present. You need not be a self-employed writer (like yours truly) to incur a taxable gain on gifts. The moment Joe converts his gift into a U.S. dollar or cup of coffee, he has a taxable event.

OK, so the complicated part is over. Now let's talk about the simple and severe pain of the IRS ruling: its treatment of lost or stolen bitcoins.

Next: The Most Definitive Bitcoin Tax Guide You Will See Anywhere - Chapter 9: Lost Or Stolen Bitcoins »



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