How does cost basis work in this situation… anyone know

Hey everyone,

I usually help my family and friends with taxes, and most of the time it’s pretty simple. But this time, one of them has a crypto transaction from 2022 and 2024 that I’m struggling to figure out.

Here’s what happened:

  • In 2022, he bought 10 Ethereum at $2,000 each and sent them to his dad overseas to pay off a debt.
  • In 2024, his dad sent the same 10 Ethereum back to him as a gift to help with school expenses.
  • He then sold them right away for $4,000 each on a US crypto exchange.

Now I’m stuck on the cost basis. Is it $2,000 or $4,000 per Ethereum?

And is there any other tax he might have to pay?

Appreciate any insights… thanks in advance!

Update: It looks like the cost basis is $2,000. Now I’m trying to understand:

  1. Why isn’t his dad responsible for any tax? (Something about non-resident alien tax rules?)
  2. If his dad filed this tax with the IRS, would my friend still have to pay?

Did his dad sell them and buy new ones or just hold them?

Corey said:
Did his dad sell them and buy new ones or just hold them?

No, he didn’t sell them. He actually added about 1.5 more Ethereum over time, but after two years, he sent back exactly 10 Ethereum to my friend, who then sold them right away.

@Avery
The cost basis would be $2,000.

Corey said:
@Avery
The cost basis would be $2,000.

Can you explain why? Or share a link where I can read more about this?

Avery said:

Corey said:
@Avery
The cost basis would be $2,000.

Can you explain why? Or share a link where I can read more about this?

In 2022, your friend basically paid off a $20,000 debt using Ethereum. Since he bought and sent them right away, he had no gain at the time. His dad then received those 10 Ethereum, so his cost basis stayed at $2,000 per coin. When a gift is given, the recipient takes on the same cost basis and holding period as the giver. So when your friend sold, his taxable gain was based on the original $2,000 price, not the $4,000 sell price.

@Corey
Got it, thanks :pray::pray::pray:

So if his dad had just sent him different Ethereum instead of the original ones, would it have counted as a tax-free gift?

Also, how does the IRS even track which Ethereum is which? :thinking:

@Avery
If his dad bought new Ethereum and sent those instead, then the cost basis would be whatever the new purchase price was.

Receiving a gift isn’t taxed, but selling it for cash is where taxes come in.

@Avery
The blockchain is public… that’s how the IRS can track it.

Avery said:

Corey said:
@Avery
The cost basis would be $2,000.

Can you explain why? Or share a link where I can read more about this?

Or to put it simply, your friend still owned that $2,000 Ethereum, his dad was just holding onto it for a couple of years.

@Corey
So why isn’t his dad paying any tax on this? And if his dad did report it to the IRS, would that mean my friend doesn’t have to?

Avery said:
@Corey
So why isn’t his dad paying any tax on this? And if his dad did report it to the IRS, would that mean my friend doesn’t have to?

Depends on what country his dad is in and their tax laws. But in the US, a gift isn’t taxed when given, only when sold.

His dad could have just sold them in his country, converted it to USD, and sent the money. That way, your friend wouldn’t have had to deal with any of this tax headache. But the dad might have owed tax in his own country.