Cryptocurrency Donations: Tax Benefits to Donors
Do you want to make a positive difference in the world?
There are many reasons why you should donate cryptocurrency to charities. Read on to learn more.
The IRS allows taxpayers to deduct donations made to qualified charities, often known as 501 (c) (3) organizations. Qualified charities can include nonprofits, schools, faith-based organizations and other charities. The charitable donation deduction acts reduce the donors taxable income, benefitting both donors and organizations alike.
Donating cryptocurrency, in particular, has many advantages over other types of donations.
A cryptocurrency is a digital money system that uses encryption techniques to control its creation and management, rather than relying on central authorities (like banks) for verification. This type of donation is ideal because it’s quick, cost-effective, pseudo-anonymous (if desired), and secure.
The tax benefits of donating cryptocurrency, however, might be its biggest advantage because donating crypto can actually lower the donor’s taxes. Cryptocurrency is considered “property” by the IRS, meaning that is subject to capital gains taxes upon its sale or transfer at a profit. As you likely already know, capital gains tax rates depend on the length of ownership and the holder’s taxable income. Long-term capital gain rates apply if the asset is held for over a year. Federal long-term capital gains rates are currently 0%, 15% or 20% depending on taxable income. State long-term capital gains rates vary (with certain states having no capital gains taxes at all!). Short-term capital gains tax rates, for assets held less than one-year, are treated as regular income taxes, typically incurring the highest tax burden.
When you donate cryptocurrency held for at least one year, the deduction amount is based on the value of the cryptocurrency at the time of the donation, and neither you nor the charity pays a capital gains tax on the difference between the purchase price of the cryptocurrency and the value of the cryptocurrency at the time of transfer.
For example, let’s say that you bought $10 worth of Bitcoin last year. By December 31st of that this year (the asset has been held for at least one year), your $10 worth of Bitcoin is now worth $80. You donate that $80 worth of Bitcoin to your favorite charity. Your charitable donation deduction is $80, not $10, and no capital gains tax is owed. If the charity sells the bitcoin, they also do not pay the capital gains tax for the $70 profit.
Given significant tax benefits for donors and charities alike, it is no surprise that there are many charities accepting crypto today.
Cryptocurrency Donations Have Significant Tax Benefits
Donations made with cryptocurrency held for at least one year result in a deduction based on the fair market value of the donated cryptocurrency. The donor can claim a deduction for the value of the contribution on Schedule A (itemized deductions). Generally, a donor may claim a charitable deduction of up to 30% of their adjusted gross income. Any gift above 30% of adjusted gross income can be carried forward for up to 5 years.
What’s more, if the donor is claiming the standard deduction (which most Americans do), there is a new $300 deduction which people who do not itemize their deductions can take in 2020 and 2021!
Tax Benefits for Donors
Donating with cryptocurrency might not be for everyone, but it does provide significant tax benefits for donors.
The IRS allows taxpayers to deduct charitable donations, which benefits both donors and organizations alike by allowing charities to benefit from the appreciation in assets like Bitcoin and other cryptocurrencies without subjecting the asset to a capital gains tax.
By avoiding paying capital gains taxes on Bitcoin and other cryptocurrency transactions, you can donate Bitcoin or other cryptocurrencies without paying any taxes on your Bitcoin/cryptocurrency profits, receiving a fair market value deduction from your adjusted gross income while significantly benefitting charities.
In addition to special considerations from the IRS, there are several reasons why donating with cryptocurrency is beneficial:
- It’s quick and simple
- Pseudo-anonymous or anonymous (if desired)
The Advantages of Cryptocurrency Donations
Cryptocurrency donations have many benefits, which include:
- Cost-effectiveness: Unlike credit card and other online transactions, cryptocurrency donations are almost instantaneous and do not incur costly transaction fees.
- Security: Cryptocurrencies use encryption techniques to control their creation and management, rather than relying on central authorities (like banks) for verification.
- Anonymity (sort of, see below): When using cryptocurrency to donate, the donor’s name or other personal information may not be required to make a contribution or receive a receipt for the donation.
- Fast processing times: Another benefit of donating via cryptocurrency is that transactions can be processed quickly and there are no waiting periods while the transaction is verified by a bank or payment processor like with credit card donations.
- Transparency: Many cryptocurrencies offer transparency in transactions, meaning that the users can view the total balance and transaction history at any time without requiring special access privileges or passwords.
The Disadvantages of Cryptocurrency Donations
Before you start donating with cryptocurrency, consider the disadvantages of this type of donation.
Even though donations are anonymous, donors could be tracked through their use of an exchange or digital wallet.
This is also a relatively new way to donate and may not be widely accepted by nonprofits. As cryptocurrency becomes more popular, it will likely become easier for nonprofits to accept these types of donations.
Still, as more and more charities begin to accept cryptocurrency, this form of donations is becoming an increasingly good option!
Are the Tax Benefits Worth it to You?
As discussed above, the major advantage of cryptocurrency donations for the donor include no capital gains tax, with the donations still being considered tax-deductible with a fair market value deduction.
A potential disadvantage of donations with certain cryptocurrencies is that the mining of particular (not all) cryptocurrencies is energy intensive and concerning to some with respect to the environmental impact. For this reason, many charities, especially those with an environmental focus, may choose to refuse donations of certain energy-intensive cryptocurrencies.
There are advantages and disadvantages to cryptocurrency donations. This topic will continue to be explored by Web3Cares.
Here’s another great overview from YouTuber ClearValue Tax:
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