Donating Bitcoin instead of money may have better tax benefits. Bitcoin or other cryptocurrency held for one year or more can be donated to a charity directly and avoid the unpaid capital gain on the Bitcoin donated and also get a charitable tax deduction for the full fair market value of the Bitcoin. For example a $100,000 donation of Bitcoin bought for $10,000 could save some taxpayers capital gains 23.8% federal tax and 17.695% (in New York City) for a tax savings of $37,346. The donation could save the same New York City taxpayer 37% federal tax and 17.695% for a tax savings of $54,695 for a total savings of $92,041. This is an extreme example of a 92% savings but the tax savings can be significant. Here are the 8 steps to donating Bitcoin to a charity and maximizing your tax benefits while avoiding mistakes.
Step 1 Verify your tax benefit in your personal tax situation with your tax professional (See Step 8).
Step 2 Donate your Bitcoin to charity. Many charities accept Bitcoin donations or Fidelity Charitable and other charities have donor advised charity funds. These funds allow donation now and tax deduction now with ability to grow your donation in mutual funds and select your charity disbursement later by check in US funds.
Step 3 Get your Thank You Letter from your Charity. The charity you donate Bitcoin to should give you a thank you letter in IRS format. The date of the Bitcoin donation and amount of Bitcoin donated will be listed.
Step 4 Charity will file Form 8282 if Bitcoin donation are liquidated by the charity.
Step 5 Complete IRS Form 8283 and obtain signature by Charity officer verifying the charity received the donation.
Step 6 Obtain Bitcoin Qualified Bitcoin Fair Market Valuation Report and signature on IRS Form 8283 from a qualified Bitcoin valuation professional. Shameless plug contact me for this service.
Step 7 Include Form 8283 with your year end personal Form 1040. Mail in with your 1040 tax filing or upload the signed IRS Form 8283 with your efiled personal tax return.
Step 8 Deduct your Bitcoin total fair market value on Schedule A of your personal Form 1040 annual tax filing. The tax deduction is limited to 30% of your adjusted gross income because you donated long term capital gain Bitcoin and avoided tax on the unrealized capital gain of your Bitcoin. You can carry over excess donation for 5 additional years if you exceed the 30% limit. The Bitcoin donation must be to a public charity registered as a public US 501C3 charity or charities like churches eligible as 501C3 charities. Private charities are problematic and charitable remainder trusts may limit your donation amount.
Bitcoin or other cryptocurrency donations are complicated but the tax benefits may be worth the extra effort. More charities are accepting Bitcoin and other cryptocurrency.