If you’re looking for gift ideas for a birthday or holiday, or just to show someone you love them, it might be worth considering a gift of Ethereum (ETH).
Over the past several years, ETH and other cryptocurrencies have become increasingly common in the investing world. While you won’t find them in every investment portfolio like you would stocks and bonds, an impressive 16% of Americans have traded cryptocurrency.
And if you’re helping a loved one save for the future, ETH could be a great opportunity — especially if that loved one has years to let it grow.
But before gifting ETH, it’s important to understand what you’re getting yourself into. This article will explain what ETH is, how to use it, how you can gift it to your loved ones, and the pros and cons of doing so.
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What is Ethereum?
Before we cover how you can gift ETH, let’s press pause for a minute and explore what ETH actually is.
ETH is one of the world’s largest cryptocurrencies by market capitalization. You’ll often hear people refer to cryptocurrencies as “cryptos,” but both terms mean the same thing.
What exactly is crypto?
Simply put, it’s a digital currency that’s secured using cryptography. It exists only online and is totally decentralized. This means that it isn’t regulated by central banks or governments in the way that “fiat currencies” like US Dollars (USD) and Euros (EUR) are.
Because cryptos like ETH live outside the world of politicians and big banks, investors are able to buy and sell them without having to worry about fluctuations in fiat currency markets.
To keep things secure, ETH is powered by blockchain technology. A blockchain is essentially a decentralized ledger supported by a global network of computers. That network maintains one central ledger of transactions that can’t be altered — keeping things transparent and secure.
Because many mainstream payment services and retailers don’t accept ETH as a supported currency for regular transactions, ETH is normally traded like a commodity rather than a currency.
As a result, ETH investors normally go for a “buy and hold” strategy in which they store ETH in a digital wallet for a relatively long period of time so that it increases in value.
At present, ETH has a market capitalization of $248.8 billion — around 15% of the total crypto market. Each ETH coin is worth more than $2,050, making it the second-most valuable cryptocurrency after Bitcoin (BTC).
Because ETH has been performing so well, it’s little wonder it has generated some big historical returns for its investors. Since its launch in 2016, ETH investors have enjoyed average annual returns of more than 194%.
That makes ETH an incredibly attractive investment — particularly for parents and family members who want to build a nest egg for the children in their lives. But before you run out and start buying up on ETH to gift to your loved ones, there are a few things you’ve got to know.
How Can Ethereum Be Used?
As we’ve already mentioned, cryptos like ETH aren’t considered “currency” by the US government (or at least, not in the traditional sense). Instead, global regulators and tax bodies like the Internal Revenue Service (IRS) treat cryptocurrencies like a commodity or asset.
In that way, buying ETH is more like buying gold than trading currencies. When you buy an ETH coin, the goal is normally to hold on to it until its price has risen dramatically. Price increases in ETH are driven by supply and demand — and when ETH finally reaches a price point where you want to trade your position, you can sell it back onto the market via a cryptocurrency exchange for a fiat currency.
The number of retailers and businesses that are accepting crypto is small but growing. A couple of payment service providers (PSPs) now allow you to set up a digital wallet to hold crypto alongside fiat currencies. As a result, there are several big chain stores where you can pay for goods using ETH. But before you go out and hold up the line at a cash register, you’ll want to check with the PSP you’re using to make sure ETH is accepted there.
Can You Gift Someone Ethereum?
The short answer is: yes, you can gift ETH. But it’s important to note there are a couple of steps involved here — and if you want to gift ETH to a minor, it’s a bit more complicated.
But don’t worry, because we’re here to walk you through the process.
How to buy Ethereum
If you want to buy ETH, your first step is to pick the trading service, brokerage, PSP, or crypto venue you’d like to use.
Generally speaking, the most popular option for buying ETH is to use a cryptocurrency exchange. Once you’ve chosen a crypto exchange, you’ll need to set up an account and a digital wallet with that exchange.
Just be aware that this process will normally include a number of “know your customer” (KYC) checks to verify your identity, address, and payment details. While that may sound a bit complicated, many exchanges can automatically carry out and clear those checks within 15 minutes.
After you’ve been verified, you’ll be able to set up a digital wallet and start buying up a cryptocurrency position in ETH using a traditional currency, like USD. Many exchanges will allow you to purchase a portion of a crypto coin — making it a lot easier to invest in cryptos with a high market value.
Once your purchase has been made, your digital asset will be deposited into your wallet. The transaction will get logged on to ETH’s public ledger, and you’ll be free to hold on to your crypto in any way you see fit until you’re ready to convert it back into traditional currency.
When it comes down to holding crypto, you’ve got two options: “hot storage” or “cold storage.”
Hot storage includes any type of digital wallet that you can access via a crypto exchange, PSP, or investment vehicle.
By contrast, cold storage is when you hold your crypto offline.
There are a couple of different cold storage methods. The most popular is a cold wallet that you can upload your crypto on to and then keep it offline until you’re ready to sell it. This often takes the form of an encrypted USB stick — but you can also opt for a paper wallet.
Generally speaking, encrypted digital wallets are a very safe and secure way to hold your online investments. Cold wallets can be an even better way to keep your ETH safe because your coins are totally offline. But if you lose or accidentally throw away a cold wallet, it can be incredibly difficult (and in some cases, impossible) to recover your investment.
How do I buy ETH as a gift?
If you want to gift ETH to a friend or a loved one, the process starts in the exact same way as if you were purchasing ETH for yourself.
You’re normally going to choose a crypto exchange, set up an account, and either link that account to a fiat currency bank account or credit money to it so that you can buy crypto. From there, you can take out a position in ETH that’ll then get placed into your digital wallet.
Most exchanges and PSP apps will then allow you to transfer your ETH investment into somebody else’s account. This means if your friend or relative sets up a digital wallet with the same exchange (or a compatible service), you can gift ETH to somebody in a few simple swipes.
If the person you’re gifting to doesn't have a digital wallet, they’ll normally need to set that up first so you can perform an online transfer.
That being said, there are a couple of other options.
For example, quite a few popular crypto exchanges will let you gift ETH using a gift card. This method is a lot less labor-intensive for the gifter. All you’ve got to do is purchase ETH using your account, choose how much ETH you’d like to gift from that account, and enter the recipient’s details. The recipient will then be sent an email with instructions on how to redeem their crypto gift.
Another option is to purchase ETH via an exchange and then download your crypto onto a cold wallet. You can then physically gift your cold wallet to a friend or loved one. Once the individual you’ve gifted to is ready to exchange their ETH for a fiat currency, like dollars, they can set up a digital wallet, upload the crypto from their cold wallet, and make a trade.
As we’ve already pointed out, you’ll just need to make sure the recipient of your gifted wallet understands how important the wallet is. If they lose a hardware or paper wallet, their crypto will likely be lost forever.
How do I get cryptocurrency for my child?
Gifting ETH to an adult is pretty straightforward. But if you want to gift crypto to a child, there are a couple more steps involved.
Most crypto exchanges or brokerages require you to be at least 18 years old to set up a digital wallet. This means that if you want to gift ETH to a child, you won’t be able to transfer that asset into a wallet belonging to them.
As a result, some investors will set up a separate digital wallet that they can use to hold ETH specifically for a child. But from a legal point of view, because it’s in the adult’s name, that investment will still belong to the adult. Other families choose to pass on cold wallets for children to hold on to in a safe place until they turn 18.
A more dynamic option is to gift ETH using a custodial account like EarlyBird Crypto.
Through EarlyBird Crypto, you can set up a digital wallet through our partner Gemini to purchase either ETH or BTC for a child in your life. You’ll be able to monitor and manage that wallet alongside your child’s UGMA using the EarlyBird app — helping you to diversify your child’s portfolio and build them an even bigger nest egg for the future.
Is Sending Crypto to Another Person Taxable?
Regulators have been trying to figure out the best way to tax crypto gifts for a while. But right now, tax bodies like the IRS simply tax crypto transactions based on the capital gains you make (or don’t make) when you decide to sell your crypto assets.
Simply put, a capital gain is the amount of profit you make after selling an asset. This means that if you bought an ETH coin for $2,000 and then sold it a year later for $3,000, your capital gain would be $1,000.
When gifting ETH, you won’t normally have to pay tax on the transaction unless it goes over your annual gift tax allowance. In 2022, the gift tax allowance is $16,000 per person per year.
If you go above that amount, you’ll have to report the gift to the IRS using Form 709 and then send that form in with your annual tax return. The person you’re gifting the ETH to shouldn’t have to pay any taxes on their end until they’ve sold it.
Once the giftee has exchanged their ETH for a fiat currency, they’ll need to pay taxes on any capital gains they’ve made.
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. But if you sell crypto more than a year after you received it, any profit you make will count as a long-term capital gain. This will get taxed at the lower capital gains rate.
Conclusion
If you’re still new to the world of cryptocurrency, don’t worry — you aren’t alone! But now you know that cryptocurrencies like ETH are a great way to send a financial gift to a loved one and invest in their future.
And if you are wanting to gift crypto to the kids in your life, EarlyBird has you covered. With an EarlyBird Crypto wallet, you can deposit a sign-on bonus today, and be first in line when our gifting functionality becomes available.
Download EarlyBird today to gift cryptocurrency and start investing in a child in your life’s future.
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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.
