Donating or Gifting Virtual Currency – North Carolina Bitcoin Lawyers
If you are thinking of donating cryptocurrency to a charity, there are a few things you should consider. First, the charity you choose must be a 501(c)(3) organization approved by the IRS for tax-deductible donations, and second, you need to see if they accept cryptocurrency donations. These aspects need to be taken into consideration before you sell your cryptocurrency and donate the after-tax proceeds.
Say the charity does not accept cryptocurrency donations, so you sell some of your own to make the donation, thereby incurring a capital gain or loss on the sale. You may then deduct the full fair market value of that donation, plus any fees involved in the sale, up to 50% of your gross income. If you donate an amount more than 50% of your adjusted gross income for the year, you can then roll any unused donation amount forward for up to five years.
In the event that your charity, allows you to donate your cryptocurrency directly to a charity, there are two significant benefits, both for you and the charity. In such a case, you donate the cryptocurrency as property, meaning that if you held the cryptocurrency for one year plus a day or longer, you may deduct the fair market value as of the date of the donation, without the need to change your cryptocurrency to dollars, and thereby avoiding the capital gains tax. It is important to note that when donating property, you may only be allowed to deduct up to 30% of your adjusted gross income, but any remaining deduction may be rolled forward for up to five years. Thus, the benefits of donating cryptocurrency directly to a 501(c)(3) charitable organization are:
- Your tax deduction will be equal to the fair market value of the donated cryptocurrency.
- Your gift to charity will be larger because there are no capital gains taxes, the 501(c)(3) charity will receive the full value of your contribution.
However, there are some other IRS reporting requirements that come into play when donating property. For instance, if the donated property is valued at more than $500, the IRS requires Form 8283 to be filed with your tax return. Additionally, if the property is valued at more than $5,000, not only is an appraisal required, but also a written and signed acknowledgement from the charity which states the value of the property that you donated. Both documents must be included with your tax return. Although there is an exception to the appraisal requirement for donations of publicly traded stock, because the value of such property is readily available from the stock exchange, no IRS guidance has been issued on cryptocurrency in that regard.
Remember that charitable donations are itemized deductions, meaning the donations may help you from a tax standpoint only if you choose to itemize deductions. This applies even if you are a small business filing a Schedule C or filing as an S Corporation. While donations do not reduce the taxable income of the business, they will move over to Schedule A as itemized deductions. If the taxpayer doesn’t itemize their deductions, then no tax benefit to the donation will be realized. Then there are those donations that are not tax-deductible.
If a taxpayer were to give cryptocurrency to a person or organization that is not a 501(c) (3) organization, that would be classified as a gift, and not as a donation. So long as the taxpayer doesn’t give any single person/organization more than $15,000 (for tax year 2018), you will have no tax obligations whatsoever. Moreover, there are no taxpayer limitations on gifts to spouses, political organizations, charities, students for tuition costs, and medical expenses.
The recipient of a gift is also usually exempt from taxes for that gift, although that may not always apply when the gift is a cryptocurrency. The problem arises when the gift of property causes the recipient to realize a capital gain or loss upon sale, because those transactions then become taxable.
A gift recipient has the same cost basis that is attached to the gifted property from the time the person who is giving the gift purchased it. For example, if a recipient is gifted a quantity of Bitcoins which were initially purchased for $10 each several years ago by the person giving the gift, and were to subsequently sale them for $5,000 each, that recipient would owe taxes for the $4,990 gain per Bitcoin. When thinking about gifting cryptocurrency to someone, it is important to remember that at any time a gift of cryptocurrency is converted into fiat or used to purchase something, it should be viewed as a taxable event.