Charitable contributions are about more than generosity—they can help you save a considerable amount on your taxes. In particular, donating cryptocurrencies that have appreciated value can help avoid capital gains taxes, reduce other taxes, and support the causes you care about most. It's a win-win for investors and charitable organizations.
Let's look at why you should consider donating crypto assets, how the process works, and some critical considerations.
Donating appreciated crypto assets is a great way to reduce your tax liabilities while supporting the causes you care about most.
Why Donate Crypto?
Charitable donations are tax-deductible for taxpayers that itemize deductions. In 2021, the IRS also provides a tax deduction of up to $3000 for those that use the standard deduction. As a result, taxpayers with a tax liability over $3000 should consider a donation—and donating appreciated assets can help eliminate capital gains tax liabilities.
The standard deductions for 2021 are:
For example, suppose that you purchased $150 worth of Bitcoin a few years ago, and it appreciated to $300. At the long-term capital gains tax rate of 15%, you owe $45 in capital gains tax on the amount. You could donate the Bitcoin to realize a $300 tax deduction against your other tax liabilities and avoid paying $45 in capital gains taxes—a win-win-win.
The most important caveat is that you must still pay capital gains taxes if you donate crypto held for less than one year. Even worse, you can only claim a deduction for the crypto asset's cost basis rather than the total amount. As a result, you should only donate crypto assets that you've held for more than one year to maximize your tax benefit.
People that itemize deductions can donate up to 100% of their adjusted gross income, depending on the type of donation. While the IRS temporarily raised charitable deduction limits to 100% of AGI, the new rule doesn't apply to non-cash donations. Still, there's ample opportunity for strategic donations for those that itemize deductions.
How to Donate Crypto
Start by identifying the charities you'd like to donate to and ensure that they're tax-exempt organizations. The IRS provides a simple search tool that you can use to verify the status. In addition, you should ensure that the organization provides a receipt showing their name, address, date of the donation, and the donation amount at a minimum.
The next step is determining what crypto assets to donate. In most cases, you'll want to donate your most appreciated assets to avoid the most capital gains tax. You must donate the actual crypto asset to avoid triggering capital gains taxes. If you liquidate the crypto asset to cash or exchange it for another coin, it will trigger a taxable event.
Most crypto donations are made via a wallet-to-wallet exchange or using tools, such as Coinbase Commerce, that work like merchant accounts. When making a donation, you should double-check to ensure that you’re sending cryptocurrency to the correct address since blockchain transactions are generally irreversible.
Another great way to donate crypto is via The Giving Block. Founded in 2018, The Giving Block is turning Crypto Philanthropy into one of the greatest forces for good on the planet by making cryptocurrency fundraising easy for nonprofits while empowering donors to give Bitcoin and other cryptocurrencies to their favorite causes. The Giving Block currently enables more than 700 mission-driven organizations, charities, universities, and faith-based organizations of all sizes to accept cryptocurrency donations and helps them maximize their fundraising outcomes with strategic consulting and personal support. Learn more and discover why cryptocurrency is the fastest growing donation method for Millennial and Gen-Z donors, at TheGivingBlock.com.
The last step is reporting donations on Form 1040 Schedule A under Itemized Deductions. If the donations amount to more than $500, you also need to register the total on Form 8283 Section A under Noncash Charitable Contributions. If they're more than $5,000, you need to complete Form 8283 Section B and obtain a qualified appraisal.
Donating NFTs & Other Considerations
The process of donating cryptocurrencies is pretty straightforward: The asset's value is equivalent to the market value at the time of transfer. But it's much harder to determine the value of illiquid assets where the market price is less clear. For instance, the value of an NFT depends on a specific buyer's appraisal rather than a market price.
The most straightforward approach to valuing these assets is auctioning them off and donating the proceeds to charity. But, of course, the auction is a taxable event, and you wouldn't avoid capital gains tax. The best alternative is typically hiring an expert appraiser to testify to the value, although excessive amounts could trigger a tax audit.
You should also keep in mind that charitable donations are just one of many strategies that you can use to reduce taxes. For instance, tax loss harvesting is another popular way to reduce your tax burden. By realizing losses in the current year, you can offset other capital gains across your portfolio and reacquire the asset to maintain allocations.
Crypto tax software, like ZenLedger, can help you find these kinds of tax savings, as well as ensure that you're paying the right amount. You can also talk with your accountant to discuss potential deductions if you're a crypto miner or engage in trading on a professional level.
Other Ways to Cut Taxes
Donating cryptocurrencies is an excellent way to avoid paying capital gains taxes while supporting the causes that you care about most. However, it’s not the only strategy for reducing your tax burden. You should use donations as one of many different tools to help increase your after-tax crypto returns.
Some other ways to reduce your tax burden include:
- Using the right accounting method. Choose an accounting method that results in the most long-term capital gains, such as FIFO. That way, you will mostly pay long-term capital gains taxes instead of the short-term rate.
- Consider tax loss harvesting. Tax loss harvesting involves selling losing positions before the end of the year to realize the loss. These losses can help offset gains elsewhere in your portfolio and reduce your year-end taxes.
- Deduct any expenses. Professional traders or crypto miners may be able to deduct certain expenses related to their crypto activities. For instance, crypto miners can usually deduct their hardware and electricity costs.
It’s also a good idea to work with an accountant or other tax professional to maximize your deductions. They can look at your specific situation and identify ways to reduce taxes across all of your assets and income sources.
The Bottom Line
Crypto assets are worth more than $1 trillion, rivaling many parts of the capital markets in sheer size and scope. At the same time, the taxation of crypto assets has been a contentious issue. The good news is that donating crypto assets is both straightforward and advantageous, making it a core part of any tax strategy.
In a few weeks, The Giving Block will be kicking off Bag Season, their flagship crypto fundraising campaign which runs from November 30 through December 31, 2021. The Giving Block is on a mission to process more than $100M in crypto donations by the end of the year, and this campaign is the big push to hit or exceed that goal, with help from the whole community. Learn more about how to get involved here.
If you're looking for ways to streamline and simplify your crypto taxes, ZenLedger provides a comprehensive platform covering everything from simple Bitcoin transactions to complex DeFi and NFT transactions.