The use of cryptocurrency has been steadily increasing since Bitcoin was first introduced back in 2009. While there are still limitations on how and when digital currencies can be spent, they can be used in a variety of ways.
At Cook Martin Poulson, we have been hearing from our clients with questions about cryptocurrency donations to charity and the tax implications of using Ethereum or Shiba Inu to make a charitable gift. With that in mind, here is your guide to crypto donations, with information about tax deductions and how to report your donations.
Can Cryptocurrency Be Donated?
Let's start with an important question: can cryptocurrency be donated to charity?
The IRS has ruled that, in most instances, Cryptocurrency is an asset or property. That means that you may donate it to a charity that is set up to accept crypto donations. This can help to limit the amount of tax you need to pay.
There are two options for donating crypto. One would be to sell your crypto first and donate some or all the proceeds to the charity of your choice (simple to do, but less tax-efficient). The other would be to make a direct donation of crypto to the charity (more involved, but much more tax-efficient).
Are Crypto Donations Tax Deductible?
Charitable donations of cryptos are eligible to be deducted as part of your itemized deductions. You should make sure to educate yourself about the rules or work with an experienced crypto tax professional to file your tax when crypto is involved.
We mentioned two options for donations above, however, only the second option offers significant tax advantages. If you sell your cryptocurrency, you will need to pay taxes on the gains -- and that would apply even if you intended to donate the proceeds after the sale. Depending on how long you have owned the crypto you sold, you might be required to pay at your short-term capital gains rate, or at the more favorable long-term capital gains rate.
The alternative is to make a gift of the crypto directly to a charity. The benefit of this approach is that you can claim a tax deduction without having to pay any tax on the sale of your crypto assets (since you don’t have a sale of crypto in this case). This approach also helps the recipient of your donation because you’ll have more to donate.
Tax Benefits of Donating Crypto to Charity
As is the case with traditional charitable contributions, there are tax benefits to making crypto gifts to non-profit organizations and charities.
- Avoid capital gains tax. As we noted above, if you donate appreciated cryptocurrency to a qualified tax-exempt organization, you will be able to avoid capital gains tax. Under normal circumstances, any gains you made from selling appreciated digital currency would be taxed. With a charitable donation of crypto, you won't recognize any of the gains and as a result, you won't be on the hook to pay taxes.
- Take a tax deduction. The second benefit of making a crypto donation is that you can take a deduction when you file your taxes. It's important to note that this benefit applies only if you itemize deductions. Taking the standard deduction would mean that you would not be able to deduct the actual amount of your donation.
We'll show you an example later of how these two benefits could work together in a hypothetical scenario. For now, keep in mind that donating cryptocurrency can help you both by reducing your taxable income and eliminating the need to pay capital gains taxes on your earnings.
Crypto Assets to Donate for Most Tax Savings
If you decide to donate cryptocurrency to a qualified nonprofit, you should consider which crypto assets will offer you the biggest tax savings before you donate.
Your crypto assets may fall into three categories. Here they are in descending order of their ability to help you save on your taxes.
- Long-term appreciated cryptocurrency. Long-term appreciated assets (held for more than a year) should be used first if you want to donate cryptocurrency to charity. Donating them will help you avoid the capital gains tax and you'll also be able to deduct the fair market value of the currency at the time you make the donation.
- Short-term appreciated cryptocurrency. What if you don't have long-term cryptocurrency assets? The next best choice is to donate short-term appreciated crypto assets. You can still avoid paying any capital gains tax, and in many cases, you can deduct your cost basis for the asset in question. (Note that this is not the same as deducting the fair market value, which is why this option is second on the list.)
- Short-term assets in a loss position. The least tax-efficient way to donate cryptocurrency is to donate short-term assets where you are in a loss position. If that's all you have, then you will be able to reap greater tax benefits by selling your crypto at a loss (called loss harvesting), then donating the cash proceeds to the charity. In this case, your eligible tax deduction would be the actual amount donated to the charity.
One of the advantages of cryptocurrency being viewed as property is that transactions are stored on the blockchain, which can be used to prove the provenance of your donation -- something we'll talk about later in this post.
Example: Crypto Donation Tax Scenario
Let's look at an example of how donating crypto instead of cash could benefit you on your taxes.
Chad bought Bitcoin in the early days of its existence and paid $500 per coin for 20 coins, giving him a cost-basis of $10,000. He's single and earns $300,000 per year, putting him in the 15% tax bracket for long-term capital gains.
The market value of Bitcoin at the time Chad wants to make his donation is $40,000, putting the fair market value of his 20 coins at $800,000. If he were to sell five coins with the intention of donating them to charity, he would recognize gains of $197,500, putting him on the hook to pay $29,625 in capital gains tax. He could itemize his cash deduction of $170,375 ($200,000 proceeds, less $29,625 of tax).
The alternative would be to donate five Bitcoin directly to a charity. In that scenario, he would not recognize any gains as a result of the donation. The ownership of the Bitcoin would transfer to the charity. Chad would still be able to itemize his deductions with the coins’ fair market value, but he would not pay any capital gains tax. In this case, his donation would be the full $200,000.
This example makes it clear that with long-term appreciated assets, it is best to donate them directly instead of selling them first. In most cases, the same arguments apply to short-term appreciated holdings.
How to Donate Cryptocurrency to Charity
Some charities have already taken steps to ensure that they can accept direct donations of crypto. For those that have not yet taken those steps, there are two other options.
The first option is to donate money through a third-party processor. One example is Crypto for Charity, which facilitates digital currency donations in return for a 1% processing fee.
The second option for donating cryptocurrency is to do it through a donor-advised fund that accepts cryptocurrency. They can convert the cryptocurrency to cash, and you can recommend charities to be beneficiaries of your gift.
Reporting Crypto Donation Taxes
The process for donating cryptocurrencies to charity is not as straightforward as making a cash donation because the IRS classifies cryptocurrency as property.
If your donation is worth more than $500, you will need to file IRS Form 8283, which is required for non-cash charitable contributions, when you file your taxes. You should attach the form to your 1040 and make sure to read the next section about appraising crypto donations worth more than $5,000.
Keep in mind that your charitable deduction will be limited to 30% of your income. You can carry your deduction forward for up to five years, so you can still potentially benefit from deducting your entire donation.
Appraising the Value of a Crypto Donation
For donations worth more than $5,000, you will need to obtain a qualified appraisal to claim a deduction. This requirement exists because cryptocurrency is not considered a security. The same appraisal requirement would come into play if you donated other property, including real estate or artwork.
The appraisal must be done by a licensed appraiser in the state where the property (your crypto assets) is located. It must be completed no more than 60 days before the donation and no later than the due date of your taxes, including extensions. It’s crucial to find an appraiser who has experience with crypto. As of this writing, there is no special license or certification that is specific to crypto appraisals, so you'll need to do your homework to ensure you get an accurate appraisal. The appraiser will use the data stored on the blockchain to verify the number of units donated, and the fair market value of your donation, which will then be used as the amount claimed on your tax return.
You cannot use the publicly-reported fair market value of your donation without an appraisal. The IRS will not allow the deduction. The final requirement is that the appraiser must sign Form 8283. If the form is not signed, you may not take the deduction for your cryptocurrency donation.
Donate Crypto for a Tax Break
Donating cryptocurrency holdings directly to charity can help you avoid paying capital gains tax and allow for a deduction to reduce your tax bill. For those in a high-income bracket with long-term holdings, the savings can be substantial.
Do you need assistance with your crypto taxes?