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Cryptocurrency investments – such as Bitcoin and Ethereum – may provide a tax-smart opportunity to leverage high-value assets to maximize impact through charitable giving.
Donating long-term investments in cryptocurrency can unlock additional funds for charity in two ways. First, it potentially eliminates the capital gains tax you would incur if you sold the assets yourself and donated the proceeds, which could increase the amount available to charity by up to 20%. Second, if you itemize deductions on your tax return instead of taking the standard deduction, you can claim a charitable deduction at a fair market value for the tax year in which the gift is given and you may choose to transfer those savings in the form of further giving.
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Donor-recommended funds, which are 501(c)(3) public charities, can be a tax-efficient solution for accepting cryptocurrency contributions, as funds typically have the resources and expertise to evaluate, receive, process, and liquidate non-monetary assets. How does gifting a valued cryptocurrency to the Donor Advice Fund work?
Please be aware that gifts with assessed non-cash assets, including cryptocurrency, can involve complex tax analysis and advanced planning. This article is only intended to be an overview of some of the donation considerations and is not intended to provide tax or legal guidance. In addition, all gifts given to funds recommended by donors are irreversible. Please consult your tax or legal advisor.
Case study: Giving a bigger gift while increasing your tax savings
To illustrate the benefits of donating a cryptocurrency, consider Allison, who bought 10 bitcoins five years ago at $500 each at a cost of $5,000.
After five years, Bitcoin is valued at $25,000 per coin, so the total fair market value of Alison’s investment of 10 Bitcoin is $250,000. Alison could sell her bitcoin and donate the net cash proceeds to the Donor Advice Fund or any other public charity. In this case, assuming a federal capital gains tax rate of 15% based on her income level, she would make an estimate of $245,000 and owe an estimated $36,750 in federal capital gains taxes ($245,000 x 15% = $36,750).
In this scenario, as described in Option 1, after federal capital gains taxes are paid, Allison’s estimated net cash available for charitable donations is $213,250.
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Now let’s review Allison’s benefits from gifting 10 bitcoins directly to a donor-advised fund or other public charitable organization, as described in Option 2. In this scenario, Allison could waive the capital gains tax ($36,750), while potentially claiming an income tax The current year’s fair market value deduction ($250,000), assuming it details its deductions.
This default example is only for illustrative purposes. The example does not take into account any state or local taxes or Medicare net investment income tax. The tax savings shown are the tax deduction, multiplied by the grantor’s income tax rate (24% in this example), minus the long-term capital gains taxes paid.
In addition to the potential tax benefits described above, the following considerations may apply.
1. Donate before selling.
To maximize the potential tax benefits described above, you can transfer your estimated cryptocurrency, held for more than a year, directly to a Donor Advice Fund or other public charitable organization instead of selling cryptocurrency and donating money.
2. Avoid pre-arranged sales.
You must not enter into any arrangement that will compel the Donor Advice Fund or any other public charity to dispose of the cryptocurrency upon receipt. This type of “arranged sale” can reduce or eliminate the tax benefits of a donation. When cryptocurrency is received, the donor-directed fund or other public charity controls the asset. For most public charities, the general policy is to sell the contributing cryptocurrency immediately, but the charity may reserve the right to sell at any time.
3. Unique tax features may apply to cryptocurrency donations
The IRS does not recognize a gift of cryptocurrency to a donor-advised fund or any other public charity as a gift of currency or legal giving. For tax purposes, cryptocurrencies are treated as capital assets or income, depending on whether the cryptocurrency is held for investment purposes or received as a form of compensation (for example, as a mining reward or income received in the form of cryptocurrency).
- If the asset has been held as an investment for more than a year and you itemize discounts, you can deduct the fair market value (as determined by a qualified appraisal) for the gift, up to 30% of your adjusted gross income (AGI) with a five-year carry-over.
- If the cryptocurrency is held as an investment for one year or less, or is not held for an investment (for example, an ordinary income asset, such as where cryptocurrency is mined or received in exchange for services rendered), and you itemize the discounts, you can deduct the lowest cost or value basis Fair market at the time of the contribution, up to 50% of your AGI with a five-year carry-over.
To prove the charitable income tax deduction, you must complete Form 8283 and obtain a qualified appraisal from a qualified appraiser for cryptocurrency contributions of more than $5,000.
This infographic contains more information about donating estimated non-cash assets to charities to maximize the power of giving.