Why Crypto Gifts and Inheritances Are Now a Tax Issue

Back in 2020, giving your kid 5 Bitcoin as a birthday present felt like a tech-savvy gesture. No one asked questions. No forms were filed. But starting January 1, 2025, that gift could trigger a tax report - and if you don’t handle it right, you could face penalties. The IRS doesn’t see Bitcoin as money. It sees it as property. That means every time you give, sell, or inherit crypto, it’s treated like handing over a house, a car, or shares in a company. And now, the rules are changing fast.

The big shift? Form 1099-DA is now mandatory. Any exchange, broker, or platform that handles crypto trades for U.S. customers must issue this form for every transaction in 2025. That includes gifts, sales, swaps, and even staking rewards. The form reports the fair market value at the time of the transaction, the date, and who was involved. By early 2026, the IRS will have a digital paper trail of nearly every crypto transfer you made last year.

What Counts as a Taxable Crypto Gift?

Not every crypto transfer is taxable - but most are. If you give someone crypto worth more than $19,000 in a single year (the 2025 gift tax exclusion), you must file Form 709 with the IRS. That doesn’t mean you owe tax right away. The federal estate and gift tax exemption is still $13.61 million per person in 2025. So most people won’t pay a cent. But you still have to report it.

Here’s what counts as a gift:

• Transferring crypto directly to someone else’s wallet
• Buying crypto and sending it to a friend or family member
• Adding someone as a joint owner on a crypto wallet
• Using crypto to pay off someone’s debt

What doesn’t count? Giving crypto to your spouse (spousal transfers are tax-free), or donating to a registered nonprofit. But if you send 3 Ethereum to your cousin for their wedding? That’s a reportable gift.

How Inheritance Works With Crypto - And Why It’s Tricky

Inheriting crypto is different from inheriting cash. When you get stocks or real estate from a deceased person, the cost basis steps up to the value on the date of death. That means if your parent bought Bitcoin for $500 and it’s worth $80,000 when they die, you inherit it at $80,000. If you sell it later for $85,000, you only pay tax on the $5,000 gain.

That same rule applies to crypto - but only if you can prove the value. The problem? Most people don’t keep records. They don’t track which wallet held which coins, or when they were bought. And now, starting in 2025, you can’t use a single average cost basis anymore. The IRS requires wallet-by-wallet accounting. If you inherited Bitcoin from two different wallets - one bought in 2017, one in 2022 - you must track each separately. No more lumping them together.

And here’s the real hurdle: private keys. If your parent didn’t leave you the private key or recovery phrase, the crypto is locked forever. No court order can force a wallet provider to unlock it. That’s why estate planning for crypto isn’t just about wills - it’s about secure access. Experts recommend storing keys in a sealed envelope with your lawyer, or using a trusted digital vault with multi-signature access.

What Happens If You Don’t Report?

The IRS used to struggle to track crypto. Now, they’re getting help from exchanges, banks, and real estate platforms. If you sold crypto to buy a house in 2025, the title company has to report the transaction on Form 1099-S. If you used crypto to pay for a car, that’s now a taxable event. And if you inherited crypto but never reported it, the IRS can cross-reference Form 1099-DA with your past returns.

Penalties for underreporting are steep. Failure to file Form 709 for a reportable gift can cost you 25% of the tax due. Late filing of Form 1099-DA data on your personal return can trigger accuracy-related penalties of 20%. And if the IRS thinks you’re hiding crypto on purpose - say, by transferring it to a non-U.S. exchange - you could face civil fraud penalties of up to 75%, plus criminal charges.

There’s no such thing as “crypto anonymity” anymore. Every transaction leaves a trace. Even if you use a decentralized exchange, the moment you convert crypto to fiat or move it to a regulated wallet, your identity is tied to the chain.

How to Prepare Before 2025

You don’t have to panic - but you do need to act. Here’s what to do now:

1. Inventory your wallets - List every wallet you own, including hardware, software, and exchange wallets. Note the crypto types and approximate purchase dates.
2. Track cost basis - Use a crypto tax tool like Koinly, CoinTracker, or ZenLedger to log every acquisition and transfer. Don’t rely on exchange summaries - they’re often incomplete.
3. Document inheritance plans - If you own crypto, update your will or trust. Include clear instructions on how to access your keys. Consider using a multi-sig wallet with a trusted executor.
4. Consult a tax pro - Not every accountant knows crypto. Find someone who’s filed Form 709 for crypto gifts or handled inherited digital assets. Ask if they’ve worked with Form 1099-DA data before.
5. Don’t try to dodge taxes - Moving crypto to a friend’s wallet to avoid reporting is fraud. The IRS knows how to trace chain movements. Even if you use a mixer or privacy coin, you’re still liable for the original transaction.

State Taxes and Crypto Inheritance

While the federal government gives you a $13.61 million exemption, some states don’t. Washington State, for example, taxes estates over $2.193 million at rates from 10% to 20%. If you live in Washington and inherit $3 million in crypto, you’ll owe state estate tax - even if you owe nothing to the IRS.

Other states to watch: Connecticut, Massachusetts, Minnesota, New York, Oregon, and Vermont. All have their own estate tax thresholds, and they’re catching up to crypto. If you’re unsure, check your state’s department of revenue website. Don’t assume federal rules apply everywhere.

What’s Still Unclear in 2025

The rules are clearer than they were in 2023, but gaps remain:

• There’s no standardized system yet for brokers to automatically pass cost basis data to each other - so you still have to manually track every transfer.
• Cash-equivalent reporting for large crypto payments (like $10,000+ in crypto for a car) is still delayed. That could change in 2026.
• Non-U.S. crypto exchanges aren’t required to report to the IRS - but if you’re a U.S. resident, you still must report any foreign holdings over $10,000 on Form 114 (FBAR).
• There’s no official guidance on how to value crypto received from airdrops or hard forks in an inheritance. Most tax pros use the fair market value on the date of death - but that’s not written in stone.

These gray areas mean professional advice isn’t optional anymore. What worked in 2022 won’t fly in 2025.

Final Takeaway: Crypto Isn’t Lawless - It’s Just New

People still think crypto is a wild west. It’s not. It’s a regulated asset class, and the government has the tools to track it. Gifts and inheritances aren’t loopholes - they’re events that trigger tax consequences. The key isn’t avoiding taxes. It’s reporting them correctly.

If you’re holding crypto and plan to pass it on - whether as a gift or an inheritance - start organizing your records now. Don’t wait for the IRS to find you. Build a clear trail. Know your basis. Protect your keys. Talk to a pro. The next few years will be the most important for crypto estate planning since the first Bitcoin was mined. Get it right, and you protect your family. Get it wrong, and you risk everything you’ve built.