What to know about donating cryptocurrency to charity

Cryptocurrency donations to charities are booming, giveaways continue to flow as the calendar draws to a close.

There has been a 583% increase in digital asset donations in 2021 compared to 2020 on Crypto Giving Tuesday, a campaign launched by The Giving Block, a crypto donation and fundraising platform for organizations at non-profit and individuals.

On Crypto Giving Tuesday 2021, the Washington, DC-based company processed $ 2.4 million in giveaways, with an average donation of $ 12,600, according to the company, and donations continued through the holiday season.

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“This day has inspired hundreds of conversations with high net worth donors, businesses and projects looking to give giveaways,” said Pat Duffy, co-founder of The Giving Block.

And other companies have seen similar growth in digital currency philanthropy.

“We saw a peak with an almost five-fold increase from 2020 to 2021,” said Tony Oommen, vice president and charity planning consultant for Fidelity Charitable, a 501 (c) 3 organization that accepts digital currency by the l through its donors. fund, a charitable investment account for future donations.

Part of the reason may be the unprecedented growth of some assets over the past year, he said. For example, the price of bitcoin has increased by almost 70% since early 2021.

However, some data suggests that digital currency owners may be more generous than other investors.

Some 45% of cryptocurrency owners gave $ 1,000 or more to charity in 2020, according to one Fidelity Charity Study, compared to 33% of all investors.

“I think people who are often young and idealistic for the first time are receiving transformational capital,” said Duffy, explaining how this can spark a desire to give back.

While taxes are not the main motivation for gifts, there is still time to mark a write-off in 2021, according to experts. Here’s what to know before making a year-end crypto donation to charity.

The cryptocurrency is the property of IRS eyes, which means that it may be subject to capital gains taxes if sold or traded for a profit, and the length of ownership may affect rates.

If you hold digital currency for more than a year, it may enjoy long-term capital gains rates of 0%, 15%, or 20%, depending on taxable income.

However, assets held for less than 12 months may be subject to regular income taxes, up to 37% for higher income.

The tax applies to the difference between the purchase price, known as the base, and the value of the asset when it is sold, traded, or used to make a purchase.

However, someone can bypass income taxes by donating cryptocurrency to charity, and those who itemize the deductions may be eligible for a write-off.

“Make sure you have held [crypto] for more than a year if you want a deduction based on fair market value, ”said certified financial planner Leon LaBrecque, director of growth at Sequoia Financial Group in Troy, Michigan, who also works with Ronald McDonald House of Southeast Michigan to accept crypto donations. .

Donors can deduct the fair market value of a profitable asset, up to 30% of their adjusted gross income, if they have held it for more than 12 months, he said.

Of course, someone with a higher adjusted gross income can get a bigger tax break, said Ryan Losi, a Richmond, Va.-Based CPA and executive vice president at accounting firm PIASCIK.

If donations exceed 30% of adjusted gross income, they can defer excess deduction for up to five years, he said.

For example, let’s say a person’s adjusted gross income is $ 100,000 in 2021. If he donates $ 50,000 in bitcoins by December 31, he can deduct up to $ 30,000 from that. year and possibly set aside the remaining $ 20,000 over the next five years.

However, even the smallest crypto giveaways can offer a future tax benefit.

If someone plans to give $ 1,000 in cash, they can donate that amount in crypto and use the money to redeem their position, said Matt Metras, registered agent and cryptocurrency tax specialist at MDM. Financial Services in Rochester, New York.

“You’ve effectively increased your base,” he said, raising your purchase price to the new value and lowering future drawdowns if the asset continues to grow.

“It’s just a matter of how it plays out in all of your crypto holdings,” he said.

While the tax treatment for donating cryptocurrency or other assets is “almost identical,” according to Metras, there is one important difference.

“If you donate more than $ 5,000, the only caveat is that you have to get a qualified appraisal,” he said, and prices can range from $ 100 to $ 600.

The cost of the appraisal can play a role in making the decision to select the right asset, Oommen said. “It’s almost like a math problem.”

For example, let’s say someone has digital assets with growth of $ 2,000 and it costs $ 500 to appraise. If they only expect a $ 200 write-off, the donation might not provide a net financial benefit, he said.

However, the assessment can take place after the donation. Donors have until the tax filing deadline, but they must Form 8283 for non-cash charitable donations with their tax return to claim the deduction.

While cryptocurrency with built-in gains may be attractive to donate, a losing position changes strategy, experts say.

If the crypto is down, it may be better to donate other profitable assets that have been held for more than a year, Losi said.

Someone can sell digital currency at a loss to offset other profits, buy back the same asset to maintain exposure, and offer another valued investment.

“It’s really the kind of game I make knowing the crypto has plunged in the last 30 days,” Losi added.

Currently, digital assets are not subject to the so-called “wash sale” rules, a measure that prevents someone from selling lost assets and redeeming the same investments within 30 days before or after the sale.

Although House Democrats have sought to close the loophole of the December 31 crypto-wash sale, Sen. Joe Manchin, DW.Va., has said he will not vote for Build Back Better, stopping the current version of the expenditure program.

Some digital currencies have a security feature known as a “whitelist,” which only allows withdrawals to go to designated addresses, Duffy explained, and adding those permissions can take a few days.

“If you want your cryptocurrency donation to reduce taxes payable for 2021, you should whitelist the addresses now,” he suggested.

And while a growing number of nonprofits are accepting cryptocurrency, if a favorite charity doesn’t accept it, donors can use a third-party platform to make the gift.

“A donor advised fund can be used upstream to process the gift and convert it to cash so the charity can use it for its mission,” Oommen said.

Additionally, someone making a larger donation can use a platform for personalized services, such as advice on approved nonprofits, tax advice, and appraisals.