What are the options for Bitcoin donation, and how can you maximize your donation?
Did you know that you can donate your Bitcoin to charity?
Charitable giving is an excellent way to give back to your community and support organizations you believe in. And, of course, it’s a great way to offset your tax burden. Donating Bitcoin and other cryptocurrencies to charity is growing in popularity, and an increasing number of charities are accepting these types of contributions.
What are the options for Bitcoin donation, and how can you maximize your cryptocurrency donation?
Sell Bitcoin and Donate Proceeds
Many investors think it’s easiest to cash out their BTC and donate the fiat currency the sale generates. While this is a viable way of funding your end-of-year giving, and while the cash donation is tax deductible, it may not be the best option.
The culprit here is capital gains tax. Investopedia tells us that “A capital gain is the increase in a capital asset's value and is realized when the asset is sold.” While capital gains taxation is in play when you donate traditional fiat currency, with cryptocurrencies, it’s a different matter.
As we’ve explained elsewhere in our blog, “The IRS has classified crypto as a virtual currency and treats it as property (like real estate), not fiat currency or a security. As property, if you sell your crypto that has appreciated, you will have to recognize a capital gain on the sale.” This means your appreciated crypto will be taxed as ordinary income when you sell it.
In other words, if you sell your Bitcoin for more than it cost you to acquire, you made a net capital gain. Therefore, you’ll be taxed on the profits.
Consider the following illustration. Let’s say you sell $10,000 of Bitcoin that you paid $5,000 for a few years ago. That $5,000 in long-term capital gains might incur a 20% tax, totaling $1,000.
Let's say you purchased your crypto within the last year. You may still incur short-term capital gains that need to be included in your yearly tax filing. If your Bitcoin sale makes you a profit, you cannot get a standard deduction for it. This transaction will be viewed as the selling of an asset, and represent a tax liability for you.
If you have sold your Bitcoin, and want to donate the proceeds to a charity, you have a couple of options:
- You may opt to pay the tax separately and donate the full $10,000 to your nonprofit. That would be nice of you!
- You could also donate the remaining $9,000 after paying taxes. That's still a very handsome gift!
But there is a way to donate the full $10,000 of Bitcoin, and avoid having to pay capital gains tax at all.
Donate Bitcoin Directly
A better option would be to donate your Bitcoin directly to the nonprofit of your choice. While not every nonprofit is able to accept crypto donations (yet, though we’re working on it), there are huge advantages to these donations for tax purposes.
First of all, you would avoid capital gains taxes altogether. Because you are donating the property itself (remember, the IRS considers cryptocurrency property), you won’t be taxed on the proceeds of your gain. Instead, the full value of the Bitcoin goes to the charity, no matter what they opt to do with it.
What do nonprofits do with your donated crypto? Usually, they sell it immediately. No holding periods. It's liquidated within seconds, and USD is transferred directly to the nonprofit's bank account.
When you donate, the nonprofit should give you a receipt to include with your tax return. As we’ve explained in our blog:
"For crypto donations valued at over $250, you should receive a standard noncash donation receipt from the charitable organization. For crypto donations valued at over $500, you must file Form 8283 (Noncash Charitable Contributions)."
For crypto donations valued over $5,000, you must receive a qualified appraisal prepared by a qualified appraiser (because you donated property). Form 8283 must be signed by the charitable organization and the qualified appraiser. A qualified appraisal need not be submitted to the IRS unless the donation value exceeds $500,000.
And just like any non-cash donation to a nonprofit, you should be able to claim the full value of the donation as a deduction on your own taxes.
Don’t worry about the capital gains tax hitting the nonprofit, either. Remember that 501(c)3 organizations are tax-exempt, and that includes capital gains. If your nonprofit chooses to sell the Bitcoin and deposit the fiat, it will not be taxed on that revenue.
But not all nonprofits choose to sell the crypto you donated. They can also opt to keep the Bitcoin as Bitcoin, in hopes that the value will increase.
As we mentioned above, not all nonprofits are set up to accept cryptocurrency donations, including Bitcoin. If you have funds you wish to donate, please contact the charity and see if they are able to accept your gift. If they can’t, please get them in touch with our team right away so we can help you, and them, take advantage of your generous gift.
DISCLAIMER: This article is for general educational purposes only and should not be construed as tax or legal advice. Please consult your tax advisor before filing.