It’s the moment you’ve been waiting for.
The price of Bitcoin hits six figures. Your patience finally pays off and you become a millionaire. You cash in your Bitcoins to reap your financial benefits and – boom!
Hello, capital gains tax.
Now, let’s back up for a second. Ideally, before you engage in any taxable transactions, you would seek a tax professional for advice. This professional would help you minimize tax on your earnings.
In fact, they might even recommend you donate some of your Bitcoin. The reason is, the tax deduction for donating might outweigh the tax liability of selling.
But, before you donate, consider these items to make sure you do it right.
Limited Tax Deduction
For tax purposes, cryptocurrency is treated as property. Your charitable deduction for donated property is limited to 20% or 30% of your adjusted gross income, depending on which type of organization receives your donation.
Qualified Organization
To receive a deduction for your donation, you must give to a qualified organization. Churches and public charities are included in the definition of qualified organization. Political organizations are not.
Donation Acknowledgement
If your donated cryptocurrency has a value that is greater than $250, the charity should provide a written acknowledgement of the donation. Note, however, the acknowledgement does not have to include the value.
Even so, you will want to save this acknowledgement with your tax records for proof of donation.
Gift Acceptance Policy
Before you donate, confirm the charity’s gift acceptance policy includes cryptocurrency. For example, some charities require donated investment property be sold immediately upon receipt. Others, on the other hand, cannot accept non-traditional gifts.
Checking on the gift acceptance policy will help prevent your gift from being rejected. Knowing how your investment will be held, sold, or put to use might also give you peace of mind.
Donor-Advised Funds (DAFs)
To circumvent giving barriers, you can donate to a donor-advised fund that accepts digital assets. Once donated, the cryptocurrency can be sold and the cash can be gifted to the charity.
The way these funds work is, you donate your assets to a charitable fund maintained by a sponsoring organization. The sponsoring organization can be a community foundation or other 501(c)(3) organization.
After you donate your assets, you advise the sponsoring organization on which public charity can receive the funds. The sponsoring organization then accepts or rejects your advice and distributes the funds accordingly. (Normally, a rejection is not given without due cause.)
Under current legislation, you are not required to immediately select a charitable recipient. You can receive your tax deduction once the funds are donated and direct the funds to charity later.
When you donate cryptocurrency to a DAF, your charitable tax deduction is limited to 30% of your adjusted gross income.
Holding Period
As with most investments, timing matters.
If you hold the cryptocurrency for more than one year, your charitable contribution deduction is generally equal to the fair market value at the time of the donation.
If you hold the cryptocurrency for one year or less at the time, your deduction is the lesser of your basis or the fair market value at the time of the contribution.
Form 8283
Large cryptocurrency donations might require additional tax filings. The reason is, certain noncash contributions must be reported on Form 8283 and filed with your individual income tax return.
If the value of the donated cryptocurrency is more than $500, but not more than $5,000 per item, you must fill out Form 8283, Section A.
If the value is more than $5,000 per item, you must obtain a qualified appraisal and fill out Form 8283, Section B. Section B requires an authorized signature from the charitable recipient.
If the value is greater than $500,000, you must fill out Form 8283, Section B, and also attach the qualified appraisal to your return.
One point often overlooked is that the Form 8283 thresholds are based on aggregate amounts. As an illustration, let’s say you donate $2,500 of Apple stock and $3,000 of Bitcoin. Your aggregate noncash contributions are $5,500 and all reporting requirements apply.
Charitable Remainder Trust (CRT)
If you plan to become the next crypto millionaire, you not only need to plan for income tax.
You also need to plan for estate tax.
One way to do both is to create a Charitable Remainder Trust (CRT). This irrevocable trust allows you to –
- Receive annual payouts based on a percentage of the assets contributed to the trust,
- Receive a tax deduction for the portion of assets that will be donated to charity, and
- Remove contributed assets from your estate to reduce your estate tax.
Seek out an estate and trust attorney to understand how a CRT might benefit your situation. These types of trust require advanced tax knowledge and should be handled by licensed and qualified professionals.
