Donating Crypto
Cryptocurrencies offer investors a new way to support charitable causes while potentially reducing their tax burden. This strategy has several advantages for both the donor and recipient organizations.
Capital Gains Tax Avoidance
Donating appreciated long-term (held for more than a year) cryptocurrency directly to a qualified charity can avoid paying capital gains tax on the appreciated value. The greater the unrealized gains, the greater the tax avoidance. Similar to stocks, gifting unrealized short-term won't allow you to avoid the capital gains tax.
Charitable Deduction
In addition to avoiding capital gains tax, donors may be eligible for a tax deduction equal to the fair market value of the donated cryptocurrency at the time of the gift. You can claim this as an itemized deduction on your tax return, potentially reducing your adjusted gross income (AGI) to lower your overall tax obligation. You can also contribute to a donor-advised fund to reduce your AGI.
How do I claim these crypto donations as tax deductions?
It’s essential to keep accurate records of your donations, including the fair market value at the time of the gift. Your charitable gifts will only qualify for a tax deduction if it goes to a tax-exempt 501(c)(3). An organization can be a nonprofit without 501(c)(3) status, so it’s important to double-check this before you donate if you want the tax deduction. You can verify an organization’s status with the IRS Exempt Organizations Select Check tool. Before you donate, ask the charity how much of your contribution will be tax-deductible.
Conclusion
Donating cryptocurrency can be a win-win strategy for both donors and charities. It allows investors to support causes they care about while potentially reducing their tax liability. However, it's crucial to consult with a qualified tax advisor to understand the specific implications for your financial situation. As the crypto market evolves, this philanthropic approach offers a unique opportunity to make a positive impact while optimizing your tax strategy.