The Ins and Outs of Cryptocurrency Donations
If you have a cryptocurrency portfolio that's experienced gains, you may be thinking of giving some of those profits to charity. Here are some considerations that can impact your gift.
The fine print
If you sell cryptocurrency for a gain, you'll have to pay taxes—either at capital gains tax rates for crypto held for more than a year, or at ordinary income tax rates for crypto held a year or less. The 3.8% net investment income tax could also apply if your income is above certain limits.
By donating your cryptocurrency, on the other hand, you may be able to eliminate capital gains and potentially take a tax deduction in the year of the donation, assuming you itemize and depending on how you obtained the crypto.
- If you purchased the crypto and have held it for more than a year, you may be able to deduct the full fair market value (as determined by a qualified appraisal) up to 30% of your adjusted gross income (AGI)—and carry forward any remaining balance for up to five tax years. If you've held it less than a year, your deduction will be limited to the lower of your cost basis or the crypto's current fair market value, up to 50% of your AGI.
- If you mined the crypto, "the IRS has yet to provide guidance on such gifts," says Caleb Lund, director of the Charitable Strategies Group at DAFgiving360™, but there are two likely scenarios. If the crypto is considered business inventory, the deduction may be limited to its cost basis. If the crypto is considered property, the deduction may be determined by the holding period, as it would be if you had purchased it.
- If you received the crypto as compensation, your donation deduction will likely be determined by the holding period.
Donations over $5,000 will need to be valued by a qualified appraiser. You'll also need to file IRS Form 8283 with your tax return and, if the donation is large enough, include a copy of the appraisal.
"We suggest working with a tax professional to ensure you get the full tax deduction you deserve while not running afoul of the rules," Caleb says.
Optimizing your gift
When evaluating assets to donate, it's generally best to prioritize highly appreciated holdings with the lowest possible cost basis—the greater the difference, the more capital gains tax you'll potentially avoid.
If you haven't settled on a charity, you might consider a donor-advised fund account, which allows you to make an irrevocable gift—and potentially take the full tax deduction in the year of the contribution. The donor-advised fund legally controls the assets once donated, but you may recommend grants to qualified nonprofits at any time—and the assets can be invested for potential growth, thereby increasing your giving power.
"Most donor-advised funds, including DAFgiving360, work with a third-party provider to accept your crypto donation and liquidate it to cash," Caleb says. "We make the process as straightforward as we can, but be sure to factor in a few weeks if you're trying to make a donation by year-end."
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This material is intended for general informational and educational purposes only. The investment strategies mentioned are not suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Investing involves risk, including loss of principal.
Past performance is no guarantee of future results.
Digital currencies [such as bitcoin] are highly volatile and not backed by any central bank or government. Digital currencies lack many of the regulations and consumer protections that legal-tender currencies and regulated securities have. Due to the high level of risk, investors should view digital currencies as a purely speculative instrument.
The subsidiaries and affiliates of The Charles Schwab Corporation and DAFgiving360 do not provide specific individualized legal or tax advice. Please consult a qualified legal or tax advisor where such advice is necessary or appropriate.
DAFgiving360™ is the name used for the combined programs and services of Donor Advised Charitable Giving, Inc., an independent nonprofit organization which has entered into service agreements with certain subsidiaries of The Charles Schwab Corporation. DAFgiving360 is a tax-exempt public charity as described in Sections 501(c)(3), 509(a)(1), and 170(b)(1)(A)(vi) of the Internal Revenue Code.
Contributions made to DAFgiving360 are considered an irrevocable gift and are not refundable. Once contributed, DAFgiving360 has exclusive legal control over the contributed assets.
A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation.
Contributions of certain real estate, private equity, or other illiquid assets may be accepted via a charitable intermediary, with proceeds transferred to a donor-advised fund (DAF) account upon liquidation. Call DAFgiving360 for more information at 800-746-6216.
Market fluctuations may cause the value of investment fund shares held in a donor-advised fund (DAF) account to be worth more or less than the value of the original contribution to the funds.
This information is not a specific recommendation, individualized tax, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.