Can Your Crypto Charitable Donations Have a State Tax Benefit?
The simple answer is “yes,” a New Hampshire corporation, or individual with state tax liability, could benefit from making crypto donations to qualified scholarship organizations. Donated Crypto would be recognized at the fair market value (FMV) of the Crypto at the time of the donation. Consider the donation could have a deductible limitation of 30% of the adjusted gross income of the Taxpayer (see Publication 526). The tax deductible amount, in most cases, would then be limited to 30% of the Taxpayer’s adjusted gross income. In NH, the Taxpayer would receive an Education Credit valued at 85% of the Crypto donation’s FMV to then be applied to NH Business Profits Tax (BPT), NH Business Enterprise Tax (BET), or even NH Interest & Dividends Tax (I&D). This is done through an application and approval process; contact the scholarship organization for state specific requirements and to see which states have this type of program (1).
How does this work? Assuming the NH tax filing thresholds are met, the Taxpayer would donate directly to the organization after being approved. When tax returns are filed, the credit can then be used to offset the above taxes. Under some circumstances, the credits could even be carried forward to other tax periods.
It is common for NH businesses with salaried employees, personal service compensation, interest expense, and dividends to have NH BET liability. By donating appreciable property, in this case Crypto-currencies, the Taxpayer is able to offset some, if not all, of this liability, thereby directly investing in their local community.
In circumstances where the Taxpayer is part of a pass-through entity such as a IRS Sub Chapter S Corporation, LLC-Partnership, or Sole Proprietor, the donation would pass through to the individual Shareholder/Members. The Shareholders/Members would then report the donation on their IRS Schedule A to receive the credit against their tax liability.
Example: Joseph and Jonathan have a landscaping LLC located in NH. The LLC is treated as a Partnership for tax purposes, and files IRS Form1065 with schedules annually. They have several employees, and historically have been exposed to NH BET Tax, typically around $5,000 a year. Their company also accepts payment in the form of Bitcoin or Ether. They report sales revenue just the same as they would had they received cash. After holding the crypto for over a year, they decide they would like to donate the now appreciated crypto to a qualified scholarship organization. The LLC would get the approval and make the donation to receive an 85% Education Credit. Let’s say in their case, they donate Bitcoin with a FMV of $7000 , resulting in a credit of $5,950. Capital Gains would not come into play and the FMV of the donation would flow through to the members of the LLC based on their ownership percentages and be reported on their respective K1s. When the LLC files its annual return, it would apply the credit against the NH BET Tax liability, and carry forward any remainder.
This type of donation allows for some very interesting planning opportunities for those holding crypto, facing capital gains, and looking to offset state tax liabilities.
That being said, please discuss your specific situation with a qualified professional before donating crypto-currencies; this is simply a brief on the topic. Not all charitable scholarships are equal; the concepts described here may not be applicable.
The opinions and positions expressed in this article are not meant as tax advice. Always seek out qualified professionals to assist with your individual tax situation. This article is by no means a comprehensive analysis or determination of whether or not charitable donations of digital assets qualify for tax credits and does not presume that any company/firm mentioned or referenced within accepts crypto currencies. Furthermore, this article does not address the 2004 Jobs act reporting requirements for individuals, or the appraisal/valuation requirements for appreciable non-cash assets; see Publication 561 and IRS form 8283. Additional limitations and pass-through attributes are dependent on the type of Taxpayer in question, further complicating an already complex scenario which we have condensed for the sake of brevity. Financial matters are never as tidy as they seem in articles; hire a knowledgeable professional.