Gift Tax - Crypto Assets

[Yardley CPA]

Would appreciate anyone who has experience with gift tax, as my experience with the topic is limited.  I received the following email from a client:

I wanted to ask your opinion on some investments I've been dabbling with. I have been investing in crypto assets for family and friends and recently cashed out a large amount for them. I understand and am aware that money is on the hook for short term cap gains tax since I was invested in it less than a year. Since the money was invested through my investment account, am I responsible for all of the taxes or can I give pre-tax money out to my family and friends and advise them to pay taxes on their own? I optimally would like to give them pre-tax money and tell them to pay on their own, but I wanted to know your opinion first before dividing up the cash. I can prove a paper trail of where certain individuals gave me money to put into this, but I was generally given money through Venmo or cash itself. Let me know when you can.

I never professed to be an advisor,  but in this case the question seems fairly straight forward.  Thoughts?

[FDNY]

I would say he pays all the tax as he will get the 1099B.  He can give out the remainder to his friends and family and file a gift tax return, but this seems like a messy situation to me.  He would have been better off just giving out his opinion and let everyone do it on their own.  Contacting you before hand would have been the way to go.   What if he lost everyone's money?  He would be in the doghouse with family and friends with no way to pass along the losses, other than dishing out his tax savings.

 

[Yardley CPA]

32 minutes ago, FDNY said:

I would say he pays all the tax as he will get the 1099B.  He can give out the remainder to his friends and family and file a gift tax return, but this seems like a messy situation to me.  He would have been better off just giving out his opinion and let everyone do it on their own.  Contacting you before hand would have been the way to go.   What if he lost everyone's money?  He would be in the doghouse with family and friends with no way to pass along the losses, other than dishing out his tax savings.

FDNY...I agree.  Since I don't have much gift tax experience, I didn't know if there was a way to accomplish what he is asking.  Since he is going to receive the 1099, I assume he's on the hook for the tax.  Regardless, it sounds very messy to me as well, on many levels. 

[SaraEA]

Your client could possibly report the sales separately on his tax return (he has to to satisfy computer matching) and then nominee them to the recipients and issue each a 1099.  However, this could open up a can of worms.  Can you legally invest for others without some kind of license?  I know that cryptocurrencies aren't quite regulated by the regulators, but investing for others sure is.  Maybe he can report the whole thing on his own return, calculate the tax he had to pay on each investor's gain, and then gift the remainder to each of them.  (Gift tax return required only if over $15k.)  This situation underscores a major problem with the cryptos:  Novices are catching the bandwagon, some losing their shirts, and some getting themselves into places they don't want to be like your client.

[PapaJoe]

Why is gift tax even in this discussion? If family and friends gave (loaned) him money and he invested it for a profit, then he is returning the loan plus interest. I'd suggest reporting all on his return, calculate the tax on the earnings, and pay out to the recipients their loan plus earnings net of the tax paid.

[Gail in Virginia]

I don't think it can be considered a loan, since from the original post it doesn't sound like there would be an obligation to pay the loan back if the investment had lost money instead of making money.  Nor was the documentation for a loan done stating when and how it would be paid back with what rate of interest. 

Sara's answer seems to me to be closest to what he wants to accomplish.  Or pay the taxes himself, figure what the amount is that his tax increased because of investments for other people, and have them reimburse him. 

But if this is going to be an ongoing arrangement, it sounds to me like they should form an investment partnership to hold all the money and report all the income and then each investor would get a K-1 to reflect their share of the gains or losses.  But I know that is not helpful retroactively. 

[mwrightea]

"But if this is going to be an ongoing arrangement, it sounds to me like they should form an investment partnership to hold all the money and report all the income and then each investor would get a K-1 to reflect their share of the gains or losses.  But I know that is not helpful retroactively"

 

I agree with Gail.

[Max W]

Why couldn't he report income on Sched D and issue nominee 1099B's to the other participants, offsetting that part on Sch D?

https://www.kerezmancpa.com/2014/01/file-nominee-1099s/

[Roberts]

Will the crypto exchange they use generate a 1099? Most don't and even those that do won't for small amounts.

If they want to do taxes, have the client pay them and deduct it from the distribution. It isn't a loan and it isn't a gift. Technically should be run through a partnership but I doubt the IRS is going to get upset if the taxes were paid. If the client has carry forward capital losses that they burn up with the gain, ethics can come into play.