Tax Implications for Donations of Bitcoin

When considering your Bitcoin charitable donations and how it will affect your taxes, donors should first and foremost talk to a tax professional who specializes in cryptocurrency donations. Not all tax professionals are created equal, and especially when it comes to the treatment of cryptocurrency, you want to choose an individual who knows the ins and outs of cryptocurrency donation and how to maximize its benefits and minimize your tax liability. This article will give you an overview of what should be considered when making a Bitcoin donation.

The IRS Treatment of Bitcoin
One of the most favorable aspects of donating Bitcoin, or other cryptocurrencies, is that for tax purposes, the IRS considers Bitcoin property, not currency. With its explosion in value, Bitcoin that is held as a capital asset for investment purposes often allows donors a very favorable charitable income tax donation. This is because the donor can potentially use the fair market value of their Bitcoin toward their tax deduction, which can provide a large tax break from a small initial investment. For example, if you purchased $5000 of Bitcoin three years ago, and its fair market value is now $25,000, your initial $5000 purchase is now worth a tax break of $25,000.

How Long Has an Individual Owned Their Bitcoin?
The amount of time a donor has owned their Bitcoin will affect the size of the deduction they can take against their adjusted gross income. For the scenario of donating Bitcoin, let’s assume the donor has only held their Bitcoin as a capital asset (for investment purposes). In cases where an individual received Bitcoin as compensation, a gift, or a distribution from an entity, the tax basis may be different for the donor and should be discussed with a tax professional.

For Bitcoin owned for less than one year:

• The donor can deduct the lesser of the cost basis or fair market value of the cryptocurrency, up to 50% of their adjusted gross income. Typically, the donor’s deduction amount is equal to what they paid for the cryptocurrency, regardless of the current value.

For Bitcoin owned more than one year:

• The donor can deduct the fair market value of their donation, up to 30% of their adjusted gross income.
• The donor avoids paying long term capital gains tax on the appreciation of their assets.

How Much Bitcoin is the Individual Donating?In order to justify the value of the charitable contribution deduction for a donation, the donor will need to submit specific forms and documentation with their tax return.

For Bitcoin donations over $500:

• The donor must complete IRS Form 8283, Noncash Charitable Contributions, and include it with their tax return. 

For Bitcoin donations over $5000

• The donor must complete IRS Form 8283, Noncash Charitable Contributions, and include it with their tax return. 
• The donor will also need to complete Section B of IRS Form 8283 and provide a qualified appraisal of their assets. 
• The appraisal must be completed by an appraiser with verifiable education and experience in valuing cryptocurrency. 

This is a simplified version of the tax implications for donating Bitcoin. There are many nuances to consider depending on how the donor originally obtained their Bitcoin, the length of time they have owned it, and what type of charity they plan to donate it to. This is why it is crucial to work with a qualified tax professional when planning for Bitcoin donations, as they can help you maximize your overall tax deduction and minimize your tax liability.