You can’t Google anything about investments without getting hit with a few million results on cryptocurrencies.
Cryptocurrencies (or “cryptos”) are alternative currencies that have exploded in popularity over the past decade. Because they’ve exploded in popularity, they’ve also exploded in value — making them a pretty attractive investment for adults wanting to build a nest egg for the kids they love.
But before you log into a crypto exchange and start buying away, you’ve got to do your homework and make sure you understand the basics of gifting crypto and all your options.
This guide explains what crypto is, how to gift crypto, how crypto gifts are taxed, and alternatives to gifting cryptocurrencies.
What is Crypto?
Before we get into how to gift crypto, let’s take a step back and talk about what crypto is.
Crypto (or “cryptocurrency”) is a digital asset based across a wide network of computers. It’s an entirely electronic form of currency — there are no physical coins or bills to exchange.
Because various cryptos are built upon this digital, decentralized structure, they exist outside the typical constraints of central banks and federal governments. Cryptocurrency doesn’t belong to one country, like the US dollar or the Mexican peso does.
As a result, investors can buy, sell, or trade cryptocurrencies without having to worry about fluctuations in traditional currency markets.
Why are they called cryptocurrencies and how do they work?
Most cryptocurrencies use a security method called cryptography to keep everybody’s investments (and the virtual currency itself) safe.
There aren’t any physical crypto coins in the network. Instead, there are balances that are kept on a digital public ledger.
This public ledger can be accessed by anyone globally, making the system and its transactions more transparent than traditional currencies. You might sometimes hear people referring to ledgers as a “blockchain.”
Every time somebody makes a transaction using crypto, that transaction is recorded on that currency’s ledger. Each record is encrypted, and the process is called “mining.”
Whenever you buy crypto coins, you’ve got to store them in a digital wallet.
You can then use your digital wallet to spend on physical or digital goods or simply invest in other (more traditional) asset classes like stocks and bonds.
Why should you invest in crypto?
Over the last decade or so, the value of cryptocurrencies has exploded. Right now, the global market capitalization of the crypto sector is now valued at $2.6 trillion.
A lot of that stems from demand. Because the concept has proven so successful in helping investors sidestep cross-border trading barriers, politics, and inflation, there’s been a surge of interest in crypto as a new asset class.
But because cryptocurrencies are pretty new, it’s also crucial that you understand this can be a somewhat volatile asset class.
By “volatile,” we mean that the value of cryptos can vary dramatically from one day to the next. That’s why many experts recommend you invest in some crypto but spread the rest of your asset mix across more traditional and less risky assets.
We’ll cover that a bit more in a minute.
First, let’s talk numbers.
Because cryptocurrencies have been generating such high returns for investors, many organizations, networks, and fintech companies have launched their own cryptos onto the market.
As of November 2021, there are more than 7,600 cryptocurrencies being traded. But not all cryptos are created equal. That’s why very few cryptos are household names.
That being said, chances are you’ve heard plenty about the world’s biggest cryptocurrencies. Currently, the five biggest cryptos on the market are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Binance Coin (BNB)
- Tether (USDT)
- Solana (SOL)
How Do You Buy Crypto?
No matter how small your risk appetite may be, it’s difficult to ignore the lucrative returns many crypto investments have started to generate. But if you’re 100% new to cryptocurrencies, you might be wondering: how on earth do you start investing in crypto?
If you want to buy crypto, your first step has got to be to choose a trading service or crypto venue.
One of the most popular options for buying crypto is through a cryptocurrency exchange. There are also several payment services and brokerages that allow you to buy and sell crypto.
Once you’ve selected a service or crypto exchange, you’ll need to set up a digital wallet with that exchange or brokerage service.
Then, you can purchase cryptocurrency like Bitcoin or Ethereum through that account using traditional currency like US dollars.
That purchase will then get logged on the currency’s public ledger, and the crypto will get moved into your digital wallet until you want to convert it back to traditional currency.
This is where the investment element comes into play.
For example, let's say you purchase (or “mine”) three Bitcoins at $30,000 each. You can then store those Bitcoins in your wallet for several weeks, months, or years until the value has hit a target you’ve set.
If you keep those coins in your wallet until their value hits $75,000, you can then sell your Bitcoins back to the exchange for US dollars at a pretty impressive profit.
Of course, there’s no guarantee as to when or if Bitcoin will hit that value. You need to be aware of the risk that the value may drop, and you could find out you’ve paid $30,000 for something that’s no longer worth that much.
Can You Give Crypto as a Gift?
It’s one thing to buy crypto for yourself, but because many coins are turning out to be such lucrative long-term investments, you may want to gift crypto to your loved ones as well.
An important thing you need to bear in mind before you start trying to gift crypto to everybody in your life is that buying crypto for children can be tricky.
There are technically no age restrictions for trading or mining with cryptocurrencies — although established sites such as Coinbase and Paypal require users to be at least 18 years old to buy and sell crypto assets.
Because you’ve got to own a digital wallet in order to store crypto, most legitimate crypto exchanges or payment services aren’t going to allow children.
That makes gifting crypto to kids difficult — although there is one flexible workaround you may want to consider.
We’ll get to that in just a minute. First, let’s talk about gifting cryptocurrency to adults.
There are a few options you may want to explore depending on a range of factors. Each gifting method goes together with its own set of pros and cons.
To help you get started, we’ll quickly break down the basics of each way to gift crypto.
Crypto gift cards
One of the easiest ways to gift crypto to someone is by sending them a cryptocurrency gift card. A lot of currencies and websites offer crypto gift cards, and they work a lot like any traditional gift card you might get from Best Buy or Home Depot.
Using a crypto exchange that offers gift cards, you can make payments using a traditional currency. You’ll then get sent a gift card that's worth the value of whatever amount you’ve deposited.
After giving the gift card to your friend or loved one, they'd need to redeem it by logging into the same site or exchange and entering the unique details that were added to the gift card.
If the person redeeming a crypto gift card has already got a digital wallet, the coins you’ve bought for them can be directly deposited into that existing holding account. If they haven’t got a digital wallet, they’ll need to set a new one up.
But regarding crypto gift cards, you’ve got to tread carefully.
Different crypto providers are more legitimate and sustainable than others. So before buying a crypto gift card, you need to do your homework and understand what you’re getting into.
Sending a crypto gift card to a loved one is a great way to give them a digital investment — particularly if they haven’t already got an account with an exchange and they’re new to the world of crypto.
But if the individuals you'd like to gift to already have an account with an exchange, the process is much easier.
Each digital wallet has its own virtual address. Once you’ve set up your own account with a crypto exchange, you’ll need to link a traditional payment method.
From there, you can buy crypto coins like Bitcoin or Ethereum and send them to the digital wallet of your choice.
After the transfer goes through, the transaction will be recorded on the ledger, and the coins should appear in the donee’s account. The crypto is then theirs to keep or trade as they wish.
How Are Crypto Gifts Taxed?
Taxing and regulating cryptocurrencies has been a thorny issue for politicians and governments across the globe.
But right now, the Internal Revenue Service (IRS) taxes any capital gains you make on crypto just like ordinary income tax.
(A capital gain is the amount of money you gain on the sale of an asset. So if you buy one Bitcoin for $15,000 and sell it for $20,000, you’ve made a capital gain of $5,000)
In terms of gifting crypto, you shouldn’t normally be taxed on your gift unless it exceeds the gift tax allowance. In 2021, the annual gift tax allowance is $15,000 per person per year.
If you gift more than your personal allowance in crypto, you must report it to the IRS via Form 709 (the “gift tax return” form) and submit it alongside your annual tax return.
Bearing in mind that one Bitcoin alone is currently worth more than $15,000, there’s a good chance gifting a small number of cryptos to a friend or loved one will likely run over your annual gift tax limit.
If this happens, you’ve got to inform the IRS.
Likewise, the person you’ve gifted your crypto to will need to inform the IRS if they then go on to sell that crypto and realize a capital gain.
The IRS currently taxes crypto profits reported within a year of receiving the asset as a short-term capital gain. This is taxed as ordinary income — so the profit you made on the sale will be taxed at your normal income tax rate.
If the person receiving a crypto gift sells it after more than a year, it counts as a long-term capital gain. This is taxed at the lower capital gains tax rate.
It’s important to note that the size of a donee’s capital gain is determined by how much you originally paid for that asset as the donor.
Translation: if a coin was bought for $100, and then your daughter sold it five years later for $500, your daughter (the recipient of the gift) would be taxed on a $400 profit.
Crypto is definitely here to stay. More than 7,000 cryptocurrencies are being traded presently. Many of them have been on an upward trajectory for quite some time.
That makes crypto an attractive investment — and it only makes sense for you to want to share those big returns with the ones you love.
Fortunately, there are quite a few ways to gift crypto. Just tread carefully because some gifting methods are more legitimate than others. The most popular ways to gift crypto are through gift cards or exchanges.
Ready to start investing in crypto for the kids you love? Download the EarlyBird app now.
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.