Cryptocurrency has taken the world by storm within the last few years and is fundamentally changing the landscapes of commerce and philanthropy. Currently, the global market cap is now exceeding $1.8 trillion. The IRS classifies cryptocurrency as property for tax purposes, which means crypto donations to 501(c)(3) charities receive similar tax benefits as donations of stocks. Donating crypto to nonprofits can be fast, transparent, secure and tax efficient.
Tax Benefits of Donating Crypto
Donating crypto to nonprofit organizations can be more tax-efficient than using your credit card. Crypto donors in the United States pay no capital gains taxes on gifts to 501(c)(3) organizations, which otherwise would have been incurred if donors sold the crypto and then donated. This is the reason why high-net-worth individuals may choose to donate property instead of cash.
When making charitable contributions, donors will receive a tax deduction for the fair market value of the crypto, this provides an increase in deductions while making the most of their charitable giving. Cryptocurrencies may be considered capital assets held for investment, inventory, or even ordinary income depending on the utility. If held as an investment for more than one year, and they itemize deductions, donors can deduct the fair market value up to 30% of their adjusted gross income with a five-year carryover. If the crypto was held as an investment for at least a year or was not held for investment and they itemize deductions, donors may deduct the lesser cost basis at the time of contribution up to 50% of their adjusted gross income with a five-year carryover. From a tax perspective, these charitable contribution limits are like donating appreciated stocks to a charitable organization. Donors who donate property valued over $500 are required to complete Form 8283 to substantiate their charitable contribution deduction and must obtain a qualified appraisal for charitable contributions of crypto valued at more than $5,000.
In comparison, if a donor were to sell crypto and donate the after-tax assets, the taxpayer may be subject up to 20% long-term federal capital gains tax rate, and 3.8% net investment income tax depending on income, assuming that the income was held for over a year. Keep in mind, this does not include tax rates at the state level.
What is the Process for Donating Cryptocurrency?
The Giving Block and Engiven are examples of crypto donation ecosystems for nonprofits and charities to fundraise bitcoin and other cryptocurrencies. While there is a wide range of acceptable cryptocurrencies for donations, 90% of donations come from bitcoin.
There are many nonprofits to donate to from around the world. When donors decide which nonprofit they want to donate to, they have the choice to release their information or to “donate anonymously.” If choosing to remain anonymous, the donor’s information is not shared with the nonprofit. However, the cryptocurrency gifts is still recorded on the blockchain, which leaves a permanent record of the donation.
With any financial-related transaction, there is always a concern about security, especially digitally. Blockchain relies on thousands of computers to verify transactions making it difficult to tamper with the ledger. In terms of timing, the transaction of transferring crypto to a nonprofit organization is short. Donors can contribute to an organization close to their hearts in a fast and reliable way.
From the Nonprofit’s Perspective
Many nonprofits are familiar with the benefits of receiving appreciated publicly traded securities and already have a system in place to receive those donations. Allowing donations of cryptocurrency is just an extension of that process. Both The Giving Block and Engiven have procedures and the technology to help nonprofits make the donation process easy for donors.
There is a benefit to using a third– party processor. These third-party processors will handle the compliance aspect of these donations, which typically includes handling the donation receipts. This consists of IRS Form 8282, Form 8283, and the “Know Your Customer” regulations. If a nonprofit would choose to receive crypto directly in their wallet, or through an exchange (like Coinbase), the nonprofit is responsible for these regulations and filings. These third– parties will automatically convert the donations to cash, which means from the nonprofit’s perspective, it will be like any other cash donation made to the organization.
Ledgible Software Platform: Tracking Cryptocurrency for Tax Liability Purposes
While donating crypto can have its benefits, paying taxes on crypto can feel challenging at times. Ledgible is an advanced crypto software platform that determines crypto liabilities. It delivers the data to tax and accounting systems a person is already using, which means they do not have to manually compile their crypto data when it’s tax filing season. By using the platform, crypto owners can get capital gain/loss insight across their entire portfolio and review their data on a transactional level. They can also share reports with their advisors, including their tax preparers. For example, Brown Schultz Sheridan & Fritz (BSSF) has a code that our clients can enter, which would then give a BSSF tax preparer access to reports, as well as allow our preparers to calculate our clients’ crypto tax burden. To learn more, contact your BSSF Tax Advisor.
Contact your BSSF tax advisor if you have any questions on how donating cryptocurrency can help with your tax deductions.
About the Author
Ryan Harshman, CPA is a Senior Manager at Brown Schultz Sheridan & Fritz (BSSF). He graduated from the University of Maryland with a Bachelor of Science in Accounting and Finance and an Honors College Citation. Ryan has experience with many facets of accounting, including financial statement and tax preparation services for a wide range of industries, including auto dealers, distributors, nonprofits, and local governments.