The Tax Benefits of Donating Cryptocurrency Directly
Crypto-currencies have surged in the past few years and although it is a blessing, individuals must not forget their obligations to pay taxes. Tax compliance is incredibly important and disobedience may result in significant fines such as $250,000 in fines and up to 5 years in federal prison. As Benjamin Franklin famously said, “In this world, nothing can be said to be certain, but death and taxes.”
For those who are more altruistic minded, donating to charities may allow you to support your favorite causes while defraying some of your tax burden. Prior to selling your crypto-currencies, it is important that you check in with your receiving organizations to see if they accept crypto-currencies directly. The ability to accept cryptocurrencies directly is monumental because the IRS has ruled (In Notice 2014–21) that virtual currency is considered property — similar to your home, a car or diamonds. We pay taxes anytime we sell cryptocurrency and make a profit. It is also important to remember that in order to qualify for long term capital gain treatment, coins must be held for at least a year because if you donate coins held short-term (less than one year), your deduction may be significantly lower.
Being considered property, cryptocurrency now has two significant potential benefits for both your tax deduction and the charity receiving your funds:
- Your crypto donation will be valued at the time of donation at its fair market value of the donated crypto-currency. For amounts below $5,000, it may be appropriate to pull the average rate from CoinMarketCap; however, for amounts greater than $5,000, an appraisal is required by a certified appraiser.
- From the charity’s perspective, your gift will be larger because rather than paying capital gains tax, the charity can receive the entire contribution. Since charities are 501(c)(3) and therefore likely tax exempt (some private foundations are taxed at 1 or 2% for capital gains), their sale of your donated cryptocurrency is not taxed.
This results in a win-win scenario for both the donor and the charity. On one hand, donors receive a larger tax benefit because the entire FMV of the donation can be deducted and they do not have to worry about liquidation of their tokens. On the other hand, charities receive the entire amount of cryptocurrency and ultimately a larger gift.
The reason why giving cryptocurrency yields such significant benefits is because the IRS views any transaction with cryptocurrency as two separate transactions: a sell and a buy transaction. For example, if we used a cryptocurrency to buy any service or product, then the IRS views that transaction as a sale of the cryptocurrency and then the purchase of another asset, which could be a cup of coffee or a different cryptocurrency. It is this fact that makes direct giving so powerful. Since 501(c)(3) organizations are tax exempt, in most cases no capital gains tax is required when nonprofit organizations sell your donated cryptocurrency.
Giving cryptocurrency directly has the potential to yield significant tax benefits; however, often times this option is not available for most charities. Most organizations are not equipped with the expertise and infrastructure to accept these various coins on the market.
As a disclaimer, U.S. tax laws have not yet been updated to reflect the current state of the cryptocurrency market. Further guidance will hopefully be revealed soon. The rules and interpretations above are intended to serve as general guidance and should not be construed as tax advice. Please consult your tax advisor on your specific situation.