One of the newest trends in philanthropy? Donating crypto to charity. Whether this means donating bitcoin to a nonprofit or holding an NFT charity auction, it’s clear that crypto philanthropy is on the upswing: in 2021 alone UPenn accepted a $5 million donation of BTC, Ethereum founder Vitalik Buterin donated $1 billion worth of Dogecoin to India's COVID relief efforts, and Coca Cola auctioned off a custom NFT to benefit the Special Olympics.
Donating to deserving organizations is a noble cause, but it also lowers your tax bills. In 2020, the IRS confirmed that charitable donations of cryptocurrency are not subject to capital gains taxes and, in some cases, can be deducted from one’s gross income.
However, while some crypto donations are relatively easy to report on taxes, others can get quite complicated. Read on to learn more about crypto donations and how to report them to receive tax deductions.
Lower your tax bills by donating cryptocurrency
If you transfer cryptocurrency directly to a charity, the donation is not subject to capital gains taxes and it can be deducted from your overall gross income. This can amount to quite a bit of tax reduction.
For example, imagine you donate $20,000 of BTC to Save the Children, one of the growing number of charities accepting cryptocurrency donations. If you had originally acquired the BTC for $15,000 more than a year before, under normal circumstances you would have to pay taxes on $5,000 of gains. Not the case if you donate the BTC to a charitable organization or nonprofit.
What’s more, provided conditions are met, you can deduct the donation from your overall gross income, lowering your taxes in a second way. The caveat here is that the amount of the deduction is limited to 30% or 50% of your income, depending on the type of organization you are donating to. Note that the IRS’s temporary suspension of charitable deduction limits is not applicable to non-cash donations.
To ensure your donation is eligible for tax benefits, make sure you’ve met the following criteria:
You have held the donated asset for more than a year
You confirm the intended receiver of the funds is considered a tax exempt organization by the IRS
You donate the cryptocurrency directly to the organization without cashing it out or converting it to a different coin. Both of these actions are taxable events.
Hold assets you plan to donate for more than a year
If you are donating crypto that you have held for less than a year, it will still be subject to short-term capital gains taxes, which are reported on Schedule D of Form 1040.
Additionally, you will only be able claim a deduction for the asset’s cost basis. For example, if you purchased 1 BTC for $25,000 and donated that BTC 8 months later when it was worth $33,000, you could only claim the $25,000 deduction.
For these reasons, it is wise to hold assets you plan to donate for longer than a year.
Reporting your crypto charitable donation
The processes and substantiation stipulations for reporting long-term crypto charitable donations vary by the size of the donation. However, no matter the amount of the donation, you will only be able to deduct it if you choose to report itemized deductions and not take the standard deduction.
Donations under $250
If your crypto donation is worth under $250, you will report your donation on your Form 1040 Schedule A, under Itemized Deductions.
You will need a receipt from the recipient organization that shows its name and address, the date of the donation, and the amount of the donation.
Donations up to $500
If your crypto donation is worth between $250 and $500, you will still report your donation on your Form 1040 Schedule A, under Itemized Deductions. However, you will need more documentation to substantiate it.
You will need to obtain what is called a “contemporaneous written acknowledgement” of the donation from the recipient organization. This document must:
Be in writing
Include a description of the cryptocurrency donated, including an estimate of its FMV
Note whether or not the donor received any goods or services in exchange for the donation
Be received by the donor before they file their tax return or before the tax deadline
Donations over $500
For donations over $500, you will need to report the sum on Form 8283 Section A, Noncash Charitable Contributions. Substantiation requirements remain the same as those for donations over $250.
Donations over $5,000
For donations over $5,000, you will need to report the sum on Form 8283 Sections A and B, Noncash Charitable Contributions. Substantiation requirements are the same as those for donations over $250, except you must also include a qualified appraisal of the donation’s value.
Appraising the value of a crypto donation
Most crypto donations under $5,000 will be valued and reported at the asset’s spot value at the time of its donation. It’s simple: if you donated 1 ETH when ETH was trading at $3,000, you would report its fair market value as $3,000.
However, if you donate more than $5,000 worth of crypto, you will have to contact a qualified appraiser to sign off on its value, even if the asset is an exchange-traded coin whose value would typically be considered its spot value. At this time, the IRS has not offered guidance on who would qualify as a cryptocurrency appraiser. We recommend speaking to your tax professional.
Be aware that while direct donations of NFTs to charitable organizations are not subject to capital gains taxes, any proceeds from an NFT auction are, even if they are ultimately transferred to the charity. In other words, if Coca-Cola raised 10 ETH by auctioning off an NFT, it would have to pay taxes on the asset’s proceeds, even though they were later donated to the Special Olympics.
There is not a singular acceptable method for appraising NFT donations. As such, with more and more NFT art pieces being donated to museum collections, NFT appraisal is becoming quite a thorny issue.
Consider: recently, an anonymous donor recently gave 262,000 NFTs to the MoMA. Because the museum’s director describes the collection as “masterpieces of the micro-period known as Late Pandemic, [that] will fill the hallowed halls of the former library with the pixels of progress,” it’s reasonable to assume it was worth a large sum. However, what is less clear is how the works would be appraised for tax purposes—or who would do the appraisal. We recommend consulting a tax professional.
Donations of cryptocurrency to a tax exempt organization are not subject to capital gains taxes and may be deducted from your overall gross income.
To ensure you don’t trigger capital gains taxes, send your crypto gift directly to its charitable recipient. Do not cash out or convert it to another coin.
You will need to provide substantiation of your donation from the recipient, as well a qualified appraisal if your donation is worth more than $5,000.
Consult a tax professional for guidance about cryptocurrency donations over $5,000, particularly if you have donated an NFT.
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