If you’ve been following investment news over the past few years, then you’ve likely heard of Bitcoin, the first and most popular cryptocurrency on the market.
Bitcoin started off as a niche investment that most people brushed off. But in recent years, it’s become far more mainstream, and more people are now adding it to their investment portfolios. In fact, data from the Pew Research Center shows that about 16% of Americans have had some experience with cryptocurrency.
As Bitcoin and other cryptocurrencies become more popular, many people have started to consider them as gift ideas. Whether you’re giving to a friend or setting aside money for a child’s future, a Bitcoin gift might be worth considering.
This guide will explain a bit more about what Bitcoin is, how to give it as a gift, and considerations to keep in mind if you’re gifting Bitcoin to a loved one.
What is Bitcoin?
The term “Bitcoin” is practically synonymous with crypto. But why?
Simply put, Bitcoin (BTC) is the biggest cryptocurrency in the world by market capitalization. To give you a quick idea, the global cryptocurrency market is worth around $1.24 trillion. Bitcoin’s market cap is sitting at more than $553 billion — giving it a huge chunk of the global crypto market.
Since Bitcoin was launched in 2015, its value has soared by more than 8,000%. In a digital ecosystem with over 10,000 available cryptocurrencies, that’s a pretty impressive feat.
So, what makes Bitcoin so special — and, more importantly, how does it work?
Bitcoin is a cryptocurrency (or “crypto”), a relatively new form of digital-only currency. Unlike traditional “fiat currencies” like the US Dollar (USD) or Mexican Peso (MXN), Bitcoin and other cryptos aren’t associated with any central bank or government.
Instead, cryptos are totally decentralized. They rely on networks made up of thousands of computers, and they use cyber cryptography to make sure it’s impossible to counterfeit or double-spend cryptocurrency.
Because Bitcoin isn’t regulated by a government, it’s kept in check by the market using a decentralized ledger called a blockchain. The Bitcoin blockchain is essentially a huge, public document that records every transaction and trade for everyone to see. For transparency and security purposes, it’s impossible to change the ledger after a recording has been made.
In addition to relying on the market for its transparency and security, supply and demand dictate Bitcoin’s value. While treasuries get to boost or lower the value of their own fiat currencies in line with what governments want to see, Bitcoin is immune to politics. It’s simply worth what people are willing to pay for it.
Over the past couple of years, people have been willing to pay a lot. Although the price of BTC has fluctuated significantly over recent months, the price of a single coin has hovered around the $30,000 mark for the past year.
Despite the fact that Bitcoin has become a powerful asset class, most investors don’t (or can’t) treat BTC like a normal fiat currency. That’s because many payment service providers (PSPs) and retailers aren’t yet in a position to accept Bitcoin as a form of payment at cash registers.
This is starting to change a little bit — particularly with online companies. But generally speaking, most Bitcoin investors purchase coins with a “buy and hold” strategy in mind. That means they purchase Bitcoin and then simply hold on to it in a digital wallet for a relatively long period of time in the hope that it’ll increase in value.
When the market price for Bitcoin reaches a certain point, some investors will opt to trade their BTC in exchange for a fiat currency like USD.
How Do You Give Someone Bitcoin?
If you’d like to invest in Bitcoin for a friend, relative, or child, it’s totally possible to buy it and then give it to somebody else.
That being said, there are a couple of steps involved in the process — and if you want to gift Bitcoin to a child, your options will be slightly more limited.
To help you get started, here’s a quick rundown of how to buy Bitcoin for yourself and how to gift it to somebody else.
How to buy Bitcoin
If you want to purchase Bitcoin, the first thing you’ve got to do is choose the brokerage, cryptocurrency exchange, or payment service provider you’d like to use to make the purchase.
The most popular option by far is to buy Bitcoin using a cryptocurrency exchange. A crypto exchange is an online service that enables you to buy, sell, and exchange digital and fiat currencies. The reason many investors go for an exchange is that they’re generally easy to use, offer a range of options, and have relatively low service fees.
After selecting the exchange that’s right for you, you can set up an account and start a digital wallet with it.
This process typically includes a “know your customer” (KYC) check. This is to verify your identity, and it normally just means providing things like your name, address, and payment details. Most exchanges can clear these checks in as little as 15 minutes.
After the verification process is complete, you can set up your digital wallet and start buying Bitcoin. This is normally done by linking a fiat currency bank account to your crypto exchange account or by making one-off payments into your digital wallet that you can then use to exchange for BTC.
Because a single Bitcoin is worth so much in USD, most crypto exchanges will let you buy a portion of one.
After you’ve bought your Bitcoin, it’ll get deposited directly into your digital wallet. The transaction will be logged on Bitcoin’s blockchain ledger, and then you’ll be free to hold on to your Bitcoin, gift it, or spend it as you see fit.
If you’re planning on holding on to or gifting your crypto, you’ve got two storage options: “hot storage” or “cold storage.”
Hot storage is when you use a digital wallet that can be accessed online through a crypto exchange, PSP, or another type of investment vehicle.
Cold storage is when you take your Bitcoin totally offline.
The most common type of cold storage is called a “cold wallet.” This is essentially an encrypted USB stick that you can upload your crypto onto. You can then hold on to that device until you’re ready to sell your Bitcoin position back onto the market. After making that choice, it’s simply a matter of uploading your crypto back into a digital wallet and then selling up. You can also choose to go for a simpler paper wallet.
Digital wallets are generally considered a safe way to hold your Bitcoin investments online. Cold wallets can be even safer because they take your investment totally offline. But the risk with cold storage is that you might accidentally misplace your physical crypto wallet — losing access to your entire BTC investment along with it.
How to give Bitcoin as a gift
OK, so we’ve already covered how to buy Bitcoin. Now, let’s take a look at how you can gift that purchase to a loved one.
The process of gifting Bitcoin starts in the same way you’d purchase Bitcoin for yourself. First, you’d choose a crypto exchange or investment provider and set up your account. Your next steps would be to link your account to a fiat currency bank account or credit money to your account.
After that, you’ll be able to buy Bitcoin or other crypto assets — which should then get deposited directly into your digital wallet.
How you then gift this Bitcoin to a friend or loved one will depend on the recipient’s age.
If you’re gifting Bitcoin to another adult, the process is pretty simple. Most crypto exchanges and PSP apps have straightforward and well-signposted functionality, enabling you to transfer all or part of your BTC investment to someone else’s digital wallet. This means if the person you want to gift to sets up a digital wallet with the same service or a compatible one, gifting Bitcoin is just a matter of a couple of swipes.
It’s OK if your loved one doesn’t have a digital wallet yet. But they’ll likely have to set one up before you can make your online transfer.
There are also a couple of other gifting options worth exploring.
If you’re using a crypto exchange, you can also gift Bitcoin to someone using a gift card. This method is easy for a gifter to do. All you’ll have to do is take out a Bitcoin position, decide how much BTC you want to gift from your account, and enter in the giftee’s details.
The giftee will then be sent an email with instructions outlining how they can redeem their crypto gift (which will include setting up a digital wallet).
You can also gift BTC by purchasing crypto and then downloading it onto a cold wallet. From there, it’s simply a matter of physically handing that wallet to your loved one. As long as they’re the one in possession of the cold wallet, the asset belongs to them until they’re ready to upload the Bitcoin and sell it back onto the exchange.
Just remember that this option can be a bit risky. Although cold wallets are 100% safe from hackers, it’s possible to lose them. When that happens, it can be incredibly hard (and often impossible) to recover your Bitcoin.
Can I gift Bitcoin to a child?
You have to be 18 to set up a digital wallet with most crypto exchanges and brokerages. That means if you’d like to gift Bitcoin to your child, you can’t transfer it to a wallet they own directly.
It’s possible for you to start a separate digital wallet to hold BTC for your child. But because the account would be in your name, the investment would still belong to you, legally speaking. In other cases, you might pass on a cold wallet to your child to keep in a safe place until they reach adulthood.
But a safer and more flexible way to gift Bitcoin to a child is to use EarlyBird Crypto.
Using EarlyBird, you can set up a custodial account for a kid in your life in just a few easy steps. This enables you to invest cash in that child’s financial future through one of several exchange-traded fund (ETF) portfolios.
And thanks to EarlyBird Crypto, you can also set up a crypto wallet to buy Bitcoin (or Ethereum). You can then manage the wallet alongside your child’s UGMA account using the EarlyBird app.
Is Gifting Bitcoin Taxable?
The short answer is: yes. Gifting Bitcoin can be taxable. But whether you have to pay taxes on a gift will depend on how much BTC you’re giving away.
Tax bodies like the Internal Revenue Service (IRS) currently treat Bitcoin and other cryptos like an asset rather than actual currency. As a result, Bitcoin transactions are taxed based on the capital gains you make (or don’t make) when you decide to sell your crypto assets.
A capital gain is the amount of profit you make on an asset. If you make a profit within 12 months of acquiring Bitcoin by turning around and selling it within a year, your gains will be taxed at the short-term capital gains rate (which is the same as your ordinary income tax rate). But if you trade your crypto for a fiat currency more than 12 months after receiving it, your profit will get taxed at the lower long-term capital gains rate.
Because the IRS taxes crypto through capital gains, you won’t get taxed in this way by gifting crypto to somebody else. That being said, you may need to pay the IRS Gift Tax if your BTC gift exceeds your annual gift tax allowance. In 2022, that allowance is $16,000 per person per year.
If you do end up having to pay the Gift Tax on your Bitcoin gift, you must report it to the IRS using Form 709 and send it in with your annual tax return. The gift recipient won’t need to pay anything on the transaction.
That being said, the recipient will likely be taxed in the future on any capital gains they make by selling the asset.
We already know that money can make a great gift. And Bitcoin allows you to give a financial gift today that could benefit your loved one years from now.
If you are considering a monetary gift for a child’s birthday or a holiday, EarlyBird has you covered.
Download EarlyBird today to get started.
This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.