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Let's say I buy $10,000 worth of Bitcoin in the USA, which I transfer to my friend in India. He sells it for $11,000 and keeps that money himself as I have gifted him that Bitcoin. My questions:

  1. Should I pay the tax in the USA because he got profits from the Bitcoin which I sent?

  2. How does the IRS know that particular Bitcoin has been sold?

  3. Even if they know it was sold, how can they tax me as I am not the person who sold it?

  • 1
    Is this a true gift? That is, you aren't getting any benefit from it and are just giving it to him out of generosity? It's not part of any transaction? Did you make any other gifts to the same person this taxable year? If so, are you married? (If not, it doesn't matter.) – David Schwartz Jan 24 '18 at 19:05
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If this is a true gift, that is, not part of any larger transaction and given out of the kindness of your heart, then you're probably going to have to consult a tax professional because this will depend on the precise tax treaties between the United States and India.

Generally, when you give a gift to another person in the United States, you do not have to recognize the appreciation in value of that gift as a capital gain and the recipient gets the same basis you had, so they will have to pay capital gains tax when/if they sell it.

But generally, when you give a gift to someone who is not a US citizen, you do have to recognize the appreciation of the value of the gift as a taxable capital gain before you can gift it. However, this can be modified by tax treaties.

If this is not a true gift and is part of some other kind of transaction, then you absolutely must recognize the change in value of the bitcoin as a capital gain before you can give it to someone else, domestic or foreign.

You asked:

Even if they know it was sold, how can they tax me as I am not the person who sold it?

The tax is not on the sale, it's on the increase in value which is a form of income. Generally, whenever you dispose of an asset, any increase in its value is a taxable gain. There are exceptions, such as a true domestic gift, those made by international treaty, and if it's transferred because of your death.

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I am not a lawyer or a tax accountant so you can take my answer FWIW.

Your question equates to, if I gave my friend in India some USD, would I have to pay Capital Gains Tax if the value of the USD went up, or, if I gave my friend in India some peanuts, would I have to pay Capital Gains Tax if the value of the peanuts went up.

So, the answer is no, no CGT on what you gave away (unless if by some strange quirk US law requires you to pay CGT on property you have already given away anyway, if the value of said property increases?)

In Australia generally, CGT is only payable when the profit is taken, i.e. when the property is sold for a higher value than it was acquired for. I do not know that there are specific laws in Australia for CGT to be payable on forex trading, as BTC is seen akin to foreign cash here, although I believe you would still need to declare the income from the profit and pay the appropriate marginal rate of income tax on that.

  • Not a lawyer or tax accountant either, but at least if this was within the US, I believe this is wrong. If you pay someone by means of transferring an asset to them, you should pay CPG on it, and the recipient receives the assets with cost basis the value being paid. However, if it is a gift (meaning it is not in return for anything else), no CPG is owed and the recipient gets the asset with the original cost basis you had. The situation may be different for international transfers/gifts, though. – Pieter Wuille Apr 2 '18 at 0:22

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