As Bitcoin continues to grow in popularity and value (albeit, with market ups and downs, of course), more and more nonprofits are open to accepting a bitcoin donation from their supporters. But it’s not just the cryptocurrency’s popularity that’s making them interested; there are a few perks to donating bitcoin for both the donor and the organization. Although the concept is quite simple in practice, it’s essential to consider proper tax planning when donating bitcoin.
Why You Should Make a Bitcoin Donation
First, let’s look at the reasons why a bitcoin donation is a good idea. As mentioned, there are perks for both the person donating bitcoin and for the organization receiving the gift.
Perks for the Donor
In 2014, the IRS made a critical decision that impacted bitcoin and other cryptocurrency donations by defining them as “property” rather than currency. In the end, this proved to be a favorable decision for those donating bitcoin because it acted like giving appreciated stock to a charity rather than a cash donation.
Appreciated “Property” Means Growing Tax Breaks
Because of this decision, donating cryptocurrencies at an appreciated value creates a more extensive tax break for you. Your tax deduction is equal to the cryptocurrency’s current fair market value, not what you originally paid for it. Therefore, as Bitcoin grows in value, so does your tax break from donating the currency.
For example, let's say you transfer $100,000 of bitcoin to a local charity's “wallet.” You'll receive tax breaks both federally and at the state level — $15,000 in capital gains federal tax, plus $3,070 in Pennsylvania state tax (if you're a Pennsylvania resident like we are (other state tax benefits may vary)). Additionally, you’ll receive $33,000 in refunds for the federal charitable tax deduction, reaching a total tax savings of $51,070 — that's over half of your contribution.
Perks for the Organization
The charity receiving the bitcoin also enjoys some perks. To start, the process of donating bitcoin and other cryptocurrencies is far more transparent than typical cash or stock donations. These gifts run through a public blockchain ledger, so they’re faster and more cost-effective because they don’t require any authority intervention or monitoring by third parties.
Secondly, the organization doesn’t have to pay any capital gains taxes because your gift is an appreciated asset (again, much like donating stock). This perk alone can increase the size of your contribution by up to 20% because your charity of choice saves a significant portion without the tax obligation. A bitcoin donation is truly a win-win for both the donor and the organization.
Making a Bitcoin Donation
Each day, it seems that donating bitcoin and other cryptocurrencies gets easier and easier. There are apps that nonprofits can use directly on their website that allows donors to transfer the alternative currency with one click. One such app is BitPay, which processes payments free of charge for registered 501(c)(3) organizations, liquidates the donated Bitcoins, and deposits the currency directly into the nonprofit’s bank account.
Just because the ease of donating is growing doesn’t mean that all nonprofit organizations want to receive these donations just yet. So if your preferred charity doesn’t accept bitcoin, you can always donate through a third party like Fidelity Charitable Foundation. Much like the app, these third-party organizations will process the gift for you and deposit it into the charity’s bank account.
The Importance of Tax Planning & Bitcoin Donations
Before you hop online and start donating your bitcoin, you need to consider tax planning. The IRS requires bitcoin donors to file specific paperwork with their annual taxes. In particular, you’ll need to submit Form 8283 with your tax return if you're taking a deduction for non-cash donations over $500. (Remember, the IRS has decided to treat virtual currencies as property, not cash, so they require 8283 for bitcoin donations over $500.)
Now, let’s say you want to receive a tax deduction on a donation valued more than $5,000. In that case, you must get a bitcoin appraisal for your contribution.
Understanding Your Tax Benefit
Your tax deduction isn’t bitcoin-for-bitcoin (or dollar-for-dollar), and there are a few conditions to consider before you donate. The IRS permits different tax deductions depending on how long you held the “property” (the cryptocurrency) and separates those periods into two categories: less than a year and more than a year. The benefits are significantly different, so it’s essential to consider when you should donate.
You Owned the Bitcoin for More Than a Year
When you donate bitcoin that you’ve held for more than one year, you’ll generally be able to deduct the current full fair market value of the donation. This value can cover up to 30% of your adjusted gross income without having to recognize any taxable gain.
This is a very similar (and highly favorable) tax process to donating appreciated stocks with long-term capital gains embedded within them. Waiting for at least one year to make a bitcoin donation is a tax-efficient way to give to your favorite charities.
You Owned the Bitcoin for Less Than a Year
If you donate bitcoin that you’ve owned for one year or less, the tax benefits change. Your charitable deduction is only worth the original cost of the cryptocurrency or its present value, whichever is less. So, unlike waiting to donate, you can’t claim the current fair-market value unless it's less than what you originally paid. This is not a tax-efficient option. However, you can use this deduction to offset up to 60% of your income, so this may be worth it for some people.
These restrictions also apply to any bitcoin you received as compensation or payment. In this case, you’d compare the value of the current fair market value to the bitcoin value when you received it (not when the person who gave it to you purchased it). And, once again, whichever value is less is the value of your tax deduction.
Before Making You Donate Bitcoin, Plan for Your Taxes
The perks of donating bitcoin and other cryptocurrencies make it worth it. But before transferring your donation to your favored charity, make sure to consider tax planning. We hope this post helped you understand the necessary paperwork, like Form 8283, the appraisal requirements, and the conditions around how long you’ve owned the bitcoin. But if you have any questions at all, we can help — it’s why we’re here! Read our FAQs, check out our blog, or reach out to us.
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Randy Tarpey CPA