You can bypass capital gain taxes and generate a tax deduction by donating cryptocurrency such as bitcoin to qualified charities. However, if you don’t do careful tax planning, it is highly likely that you will reduce or in some cases completely eliminate the full tax benefit you can get from crypto donations.
To understand how crypto charitable donations are calculated, I will explain the impact of factors such as timing, tax profile, charity type, Adjusted Gross Income (AGI) on the ultimate deduction. Gaining a command of these could mean the difference between a sizable deduction or no deduction at all.
How Crypto Donation Deductions Are Calculated
Cryptocurrencies are treated as property per IRS Notice 2014-21 so all general tax rules applicable to property apply to cryptocurrencies. When you donate crypto assets, the total allowable charitable deduction is determined by how long you held the assets.
If you donate a crypto asset which you held for 12 months or less (short-term), the amount of the deduction is the lesser of cost basis (the amount you paid for it) or fair market value (FMV) at the time of the donation. If you donate a crypto asset which you held for more than 12 months (long-term), the amount of the deduction is the fair market value (FMV) at the time of the donation.
Crypto Donations Are Tax Advantageous Only For Those Who Itemize
Just because you have an allowable charitable deduction as calculated above, it does not mean that you are directly eligible to get a tax benefit from it.
Each year, you get to deduct either standard deduction ($12,200 for single filers and $24,400 for Married filing jointly) or a list of itemized deductions (Schedule A), whichever is higher, from your total income to reduce your taxes. For those of you who are not familiar with what I mean by “standard deduction”, think of this as a free default write off that the government gives you based on your filing status to reduce your taxes. This default write off amounts are high under the current tax code so most US taxpayers pick this deduction over a list of itemized deductions.
Crypto donation is an itemized deduction. If you pick the more beneficial standard deduction, crypto donations will not give you any additional benefit whatsoever. For a married couple, in order to get any tax benefit from crypto donations, their total of itemized deductions as listed on Schedule A such as property taxes, mortgage interest, crypto donations and other items must be higher than $24,400.
Tax Benefit Is Not Guaranteed, Even If You Itemize
Even for those who can safely itemize on their tax returns, the actual deduction you get on any given year may be limited due to complex tax rules associated with the charity deduction. Once you figure out your allowable charitable deduction amount considering how long you kept the crypto asset, the tax code limits this deduction to a certain percentage of your Adjusted Gross Income (AGI) based on the type of charity you donate (public vs. private), tax elections you make and some carry over rules.
For example, assume Sam’s 2019 AGI is $100,000 and he donated $100,000 of bitcoin which he bought in 2013 to a public charity. His total allowable charitable deduction is $100,000 which is the FMV at the time of donation. Unfortunately, in 2019, Sam can only claim $30,000 ($100,000 * 30%) as a charitable deduction on Schedule A because the annual deduction is capped at 30% of his AGI.
Sam can carry over the remaining $70,000 ($100,000 – $30,000) deduction to the next 5 years. Assuming he itemizes in the next five years and the AGI limits are met, he may be able to get the full benefit of his $100,000 deduction. However, there is also a possibility of Sam losing the tax benefit of the $70,000 carried over deduction if his financial situation changes in the next 5 years so he no longer has to itemize on his tax return. In another scenario, his AGI could also go down and at the end of the 5th year he may not be able to exhaust all the carried over deductions and lose the full benefit of the charitable donation he made 5 years ago.
Tax rules pertaining to crypto donations are extremely complex. How long you hold your crypto assets, your overall income situation (AGI), and the type of charity you contribute to and carryover rules significantly affect the actual tax benefit you can get from your crypto donation. Before planning on sending a large amount of bitcoin or cryptocurrencies to a charity, consider engaging a tax professional and/or understanding the implications of the tax benefits to optimize the structure of your donation for tax purposes.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.