Feeling Crypto Generous? Here’s How Bitcoin Donations Work
Donating Bitcoin or any other cryptocurrency to charity is a noble endeavor and a win-win situation for both parties. On one hand, those in need get potentially critical support, and you, the donor benefits from a tax deduction on capital gains.
However, if you are feeling crypto generous, you should have a solid understanding of how Bitcoin donations work. If you fail to do your due diligence, you might end up losing the full tax advantage that you receive from cryptocurrency donations.
Today, we take a close look at how to donate cryptocurrency without missing out on the tax benefits that come with it.
How Bitcoin Donations Work
If you choose to donate crypto to a public charity, you are eligible for a tax deduction of up to 30% of your Adjusted Gross Income (AGI). This condition depends on the potential gain that you might receive if you were to sell the property instead. When you donate to a private charity, your tax deduction will not be higher than 20% of your AGI.
Here’s an example that will help you understand how crypto donations work, and why you should consider them:
Suppose you purchased one Bitcoin (BTC) for $1,000 and today it is worth $10,000. If you choose to sell it, you would receive $10,000 in fiat currency. In this amount you would have $9,000 worth of gains on which you would have to pay as much as 35% in tax, depending on your jurisdiction.
Now, if you would choose to donate that Bitcoin to charity, your donation would be tax-free. The charity would then be free to exchange it into fiat currency to avoid losing anything due to the well-known volatility of the crypto market.
These are the tax deduction caps that you may be eligible for if you want to donate cryptocurrency. However, additional terms and conditions apply, and you need to have a solid understanding of how to navigate around them to get substantial tax benefits.
Tax Deductions on Crypto Donations Explained
Donating cryptocurrency to charity is a noble gesture, regardless of how generous you are in your contribution. The process is quite straightforward, effective, and accessible. Furthermore, you can later access important tax benefits for your charitable support.
To apply for tax deductions on Bitcoin donations, you must meet these three conditions:
- Custody time
- Your Tax Deductions Choice
- Meet the AGI Standards
You need to do your due diligence and research the best way to meet these terms according to your unique financial situation. You may even need the help of a tax professional to get a better understanding of the tax benefits available. Here is a summary that should help you start this process!
1. Custody Time
In the United States, you may be eligible for tax deductions from cryptocurrency donations if you have held those assets for at least 12 months. In this case, the total amount of deducted tax is the fair market value (FMV) at the time of the donation.
According to the IRS Notice 2014-21, cryptocurrencies like Bitcoin and other digital assets are considered property, so they are subject to the same laws that regulate all forms of property in the US.
When you choose to donate a digital asset that you held for 12 months or less, the total amount of deducted tax is the lesser of cost basis, which is the price that you paid for it.
2. Your Tax Deductions Choice
The US Government provides two forms of tax deductions:
- Standard deductions
- Itemized deductions
The deductions differ depending on your filing status and your yearly income. The US law enables you to write off some of the income fees that apply to your assets, gains, and possessions.
If you are single, you are eligible for a standard deduction of up to $12,200 every year as a free default write off.
If you are married, you and your spouse can submit a joint filling for a standard deduction of up to $24,400.
Most US taxpayers apply for standard tax deductions since they offer high write-offs, and they require less paperwork.
Cryptocurrency donations are subject to itemized tax deductions. Therefore, if you apply for standard deductions, you will not benefit from any tax exemptions on your crypto donations regardless of how long you had custody of those assets before selling them.
If you wish to get tax relief on Bitcoin donations, you need to apply for itemized tax deductions. Also, the value of the assets you donate has to be higher than $24,400.
3. Meet AGI Standards
Opting for itemized deductions on crypto assets that you held for more than 12 months may not be enough to give you access to substantial tax benefits at the end of the year. You will also have to meet additional criteria relating to your Adjusted Gross Income (AGI), and which include:
- The type of charity you choose to donate to (private or public)
- The tax choices that you make
- Multiple carry-over rules
The amount of tax returns that you may receive is a particular percentage of your AGI that is calculated depending on the criteria above. When you choose to donate Bitcoin, you need to take into account all of these factors. While it may be a strenuous bureaucratic process, it may prove worthwhile in the end.
Conclusion – How Bitcoin Donations Work
Cryptocurrencies are still a new addition to the property list subject to tax deductions as seen by the IRS. The tax regulations that govern crypto donations are intricate, and they come with numerous criteria that you have to meet.
The tax benefits that you may receive from Bitcoin donations depend on how long you held the coins for, and what your overall income is. They also vary according to the type of charity you choose to donate to, and to the carry-over rules that appear in the process.
If you are set on making cryptocurrency donations, your best choice is to employ the services of a tax professional. Also, by doing your due diligence before applying for tax deductions will help you understand the additional implications of your tax benefits.