The IRS views cryptocurrency as property and donating it can provide massive tax incentives.
Donating Cryptocurrency Can Reduce Your Tax Bill
Most donors' generosity comes from the heart, not only with a willingness to give freely but also to support their favorite charitable organization. Being a wise steward of their resources, they also seek ways to minimize their tax liability, enabling them to be even more generous. With cryptocurrency and its historic rise in value, donors can achieve maximum benefit with their donations. To better understand this, we need to look at what capital gains are and how they can impact your crypto donation.
Crypto and Capital Gains
The IRS has classified crypto as a virtual currency and treats it as property, 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. If you decide to donate that same crypto, your gift could have greater significance.
Example #1: If you sell your cryptocurrency for $100,000 with a $0 cost basis, you will have a gain of $100,000. If you donate the proceeds after tax (assuming a 30% tax rate) to a charitable organization, they will receive $70,000. However, if you had donated the crypto directly to the charitable organization, they would have received $100,000.
Example #2: If you sell your cryptocurrency for $10,000 with a $3,000 cost basis, you’ll gain $7,000. If you donate the proceeds after tax (assuming a 20% tax rate) to a charitable organization, they will receive $8,600.
In addition to avoiding capital gains taxes and maximizing your gift to the nonprofit, you can also benefit from a charitable contribution deduction.
Here are some common questions that will help you determine your crypto-giving strategy:
So what are Capital Gains?
Capital Gains are defined as the profit from the sale of property or an investment, with the reverse being a Capital Loss. When a cryptocurrency is sold for fiat currency (or traded for another crypto), the difference in value results in a Capital Gain or Loss. Short-term Gains (Losses) result from the profit or loss from the sale of cryptocurrencies held for one year or less. Long-term Gains (Losses) result from the profit or loss from the sale of cryptocurrencies held longer than one year.
Net Capital Gains
Short-term gains and losses are netted against each other, and Long-term gains and losses are netted against each other. Then, the short-term and long-term are netted against each other, with losses used to offset any gains.
A net short-term capital gain is taxed at the same rate as your ordinary income. A net long-term capital gain is taxed at a lower, special rate. $3,000 of net loss can be deducted annually, with any unused loss carried forward indefinitely.
Does it matter how long I hold crypto before donating it?
Yes. Donated crypto held less than one year disallows the capital gains tax benefit and only allows a deduction on your cost basis instead of the total value of the donation.
How is my cost basis determined?
When purchasing (or trading) cryptocurrency, the purchase price, less associated fees, is your cost basis. When selling (or trading) cryptocurrency, the sales price, less any related fees, is your adjusted sales price. As in the earlier examples, your cost basis is an essential component in determining your capital gain or loss.
What is a Wash Sale?
Fun Fact: The Wash Sale rule disallows a capital loss from the selling, and subsequent buying, of “substantially identical” assets within 30 days of each other. Even though this rule applies to securities, and cryptocurrency is treated very similarly for tax purposes, the wash rule does not currently apply to cryptocurrency. It is a significant benefit for tax-harvesting strategies. And if you’re planning to donate your cryptocurrency that currently has a loss, one option to consider is selling it first to take the loss, offset future gains, and then donating it.
How does mining or staking crypto affect a donation?
Since 2009, mining bitcoin has generated a lot of wealth for many people. Then came different crypto services such as staking that allowed people to earn rewards for “locking up” their crypto. When you earn additional crypto like this, a taxable event is triggered. Crypto received through mining or staking is taxed at the same rate as your ordinary income. The cost basis is the fair market value on the day it’s received. The difference in value between the day you receive it and the day you donate it will result in a capital gain or loss. The value of your donation will be determined by the length of time you’ve held the crypto.
How do I report my donation to the IRS?
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 must not be submitted to the IRS unless the donation value exceeds $500,000.
As exciting and polarizing as the topic of crypto has been, what is undeniable is the unique opportunity for generous donors to support their charitable organizations all across the world. While there are many things to consider when donating crypto, Engiven is here to make it as simple as possible, so your gift can have the most significant impact.
About Engiven: Engiven believes cryptocurrency is a valuable asset that can benefit the nonprofit community. That's why we've developed a donation platform that helps nonprofits, ministries, and enterprise-level organizations accept cryptocurrency donations to help fund their causes.
Engiven provides a safe and easy path for a 501c3 nonprofit to get set up quickly, receive crypto donations, and exchange them for fiat (US dollars). Our system verifies the gift on the blockchain and sends the proceeds via bank ACH as a direct deposit into the nonprofit's bank account. Engiven's proprietary software helps also aids in tax reporting. We provide 8282 and 8283 tax form automation.
Engiven's founders have a lifelong passion for living at the intersection of technology and doing good. Engiven's founders have collaborated on numerous companies and a wide range of technology products with diverse skills. Most recently, they developed Mogiv, an early-to-market online giving application that was acquired in 2016. Now, with the emergence of blockchain-based technologies, they have developed Engiven.
We'd love to connect if you'd like a free demo of our crypto donation platform. Please give us a way to reach you by filling out this form.
About the Author: Justin Greene, CPA, is the CFO for Engiven and also CFO for Liberty Live Church, a large multi-site church based in Hampton Roads, Virginia. Serving 20 years in nonprofit administration and specializing in the economics of blockchain and digital assets, Justin has become a leading voice in helping faith-based and nonprofit organizations step confidently into the cryptocurrency space. He is an active member of The Church Network and also sits on the VSCPA Center for Innovation Advisory Council.