The crypto ecosystem has expanded significantly in recent years. While institutions such as the IMF are starting to embrace its innovation, they are also calling for investors to exercise caution.
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Cryptocurrency donations to charity are booming, with gifts still rolling in as the calendar winds down.
There was a 583% increase in digital asset donations in 2021 compared to 2020 on Crypto Giving Tuesday, a campaign started by The Giving Block, a crypto donation and fundraising platform for nonprofits and individuals.
On Crypto Giving Tuesday 2021, the Washington, D.C.-based company processed $2.4 million in gifts, with an average donation of $12,600, according to the company, and giving has continued into the holiday season.
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“That day has inspired hundreds of conversations with high-net-worth donors, companies and projects that want to make gifts,” said Pat Duffy, co-founder of The Giving Block.
And other companies have seen similar growth in digital currency philanthropy.
“We’ve seen a spike with nearly a five-fold increase from 2020 to 2021,” said Tony Oommen, vice president and charitable planning consultant of Fidelity Charitable, a 501(c)3 organization that accepts digital currency through its donor-advised fund, a charitable investment account for future gifts.
Part of the reason may be some assets’ unprecedented growth over the past year, he said. For example, the price of bitcoin has risen nearly 70% since the beginning of 2021.
However, some data suggests digital currency owners may be more generous than other investors.
Some 45% of cryptocurrency owners gave $1,000 or more to charity in 2020, according to a Fidelity Charitable study, compared to 33% of all investors.
“I think people who are often young and idealistic are being given transformative capital for the first time,” Duffy said, explaining how it may spark the desire to give back.
While taxes aren’t the prime motivation for gifts, there’s still time to score a 2021 write-off, experts say. Here’s what to know before making a year-end crypto donation to charity.
Tax treatment
Cryptocurrency is property in the eyes of the IRS, meaning it may be subject to capital gains taxes if sold or exchanged at a profit, and the length of ownership may affect rates.
If you hold digital currency for more than one year, it may qualify for long-term capital gains rates of 0%, 15% or 20%, depending on taxable income.
However, assets owned for less than 12 months may incur regular income taxes, up to 37% for the highest earners.
The tax applies to the difference between the purchase price, known as basis, and the asset’s value when sold, exchanged or used to make a purchase.
However, someone may bypass taxes on profits by donating cryptocurrency to charity, and those who itemize deductions may qualify for a write-off.
“Make sure you’ve held [crypto] for more than one year if you want a deduction based on fair market value,” said certified financial planner Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan, who also works with Ronald McDonald House of Southeast Michigan to accept crypto donations.
Make sure you’ve held [crypto] for more than one year if you want a deduction based on fair market value.
Leon LaBrecque
Chief growth officer at Sequoia Financial Group
Donors may deduct a profitable asset’s fair market value, up to 30% of their adjusted gross income, if they’ve held it for longer than 12 months, he said.
Of course, someone with higher adjusted gross income may receive a bigger tax break, said Ryan Losi, a Richmond, Virginia-based CPA and executive vice president of accounting firm PIASCIK.
If gifts exceed 30% of adjusted gross income, they may carry the excess deduction forward for up to five years, he said.
For example, let’s say someone’s adjusted gross income is $100,000 in 2021. If they donate $50,000 of bitcoin by Dec. 31, they may deduct up to $30,000 this year, and possibly write off the remaining $20,000 over the next five years.
However, even smaller crypto gifts may offer a future tax benefit.
If someone plans to give $1,000 cash, they may donate that amount in crypto and use the cash to rebuy their position, said Matt Metras, an enrolled agent and cryptocurrency tax specialist at MDM Financial Services in Rochester, New York.
“You’ve effectively stepped up your basis,” he said, increasing your purchase price to the new value, and lowering future levies if the asset continues to grow.
“It’s just a matter of how it plays into the big picture of your crypto holdings,” he said.
Qualified appraisal
Although the tax treatment for giving cryptocurrency or other assets is “almost identical,” according to Metras, there is an important difference.
“If you’re donating over $5,000, the one caveat is you have to get a qualified appraisal,” he said, and the prices may range anywhere from $100 to $600.
If you’re donating over $5,000, the one caveat is you have to get a qualified appraisal.
Matt Metras
Cryptocurrency tax specialist at MDM Financial Services
The cost of the appraisal may play into the decision-making of selecting the right asset, Oommen said. “It’s almost like a math problem.”
For example, let’s say someone has digital assets with $2,000 growth and it costs $500 to appraise. If they only expect a $200 write-off, the donation may not provide a net financial benefit, he said.
However, the appraisal can happen after the gift. Donors have until their tax-filing deadline, but they must file Form 8283 for non-cash charitable gifts with their tax return to claim the deduction.
Crypto wash sale loophole
While cryptocurrency with built-in gains may be appealing to donate, a losing position changes the strategy, experts say.
If crypto is down, it may be better to donate other profitable assets held for more than one year, said Losi.
Someone may sell digital currency at a loss to offset other profits, rebuy the same asset to maintain exposure and gift another appreciated investment.
“That’s really the kind of play I’ve been doing knowing that crypto has taken a dive in the last 30 days,” Losi added.
Currently, digital assets aren’t subject to so-called wash sale rules, a measure that stops someone from selling losing assets and repurchasing the same investments within 30 days before or after the sale.
Although House Democrats had aimed to close the crypto wash sale loophole as of Dec. 31, Sen. Joe Manchin, D-W.Va., said he won’t vote for Build Back Better, halting the current version of the spending package.
Crypto donation tips
Some digital currency has a security feature known as “whitelisting,” which only permits withdrawals to go to designated addresses, Duffy explained, and adding these permissions may take a few days.
“If you want your crypto donation to reduce tax liability for 2021, you should be whitelisting addresses now,” he suggested.
And while an increasing number of non-profits are accepting cryptocurrency, if a preferred charity doesn’t, donors may use a third-party platform to make the gift.
“A donor-advised fund can be used in the front end to process the gift and convert it to cash so the charity can use it for their mission,” Oommen said.
Moreover, someone making a larger gift may use a platform for personalized services, such as guidance on approved nonprofits, tax guidance and appraisals.
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