Written by: Cody D. Belland, CPA, JD
With the holiday season upon us, many taxpayers are in the gifting spirit. For those taxpayers sitting on large unrealized cryptocurrency gains, there is a unique opportunity to satisfy philanthropic desires while also receiving a tax break.
As you may be aware, the IRS treats cryptocurrency as “property.” For income tax purposes, the IRS allows for a deduction equal to the fair market value of appreciated property contributed to a charitable organization, without any adverse capital gain tax consequences to the taxpayer.
For example, if a taxpayer bought $10 worth of Bitcoin ten or so years ago, the value of that investment would now be close to $80,000 today. If the taxpayer donated their Bitcoin to a qualified charity, they would receive an $80,000 charitable deduction, without ever realizing the gain of $77,990. If the same taxpayer had instead sold the Bitcoin and donated the cash proceeds, they would still receive a charitable deduction of $80,000, but they would also realize a taxable capital gain of $77,990. For that reason, it is almost always most tax efficient to donate appreciated property to charity, rather than selling the property and donating the cash proceeds.
But it gets better.
Instead of making contributions directly to charitable organizations, taxpayers can also make contributions to donor-advised funds and later decide on what charities to disburse the funds to, while receiving a current year deduction for the full value of the contribution. Recently, the largest donor-advised funds have started accepting donations of cryptocurrency, which provides an excellent tax planning opportunity. Taxpayers should consult with their financial advisors or reach out to their donor-advised fund sponsor of choice to see if the fund accepts cryptocurrency contributions.
A donor-advised fund could also be a great option if a taxpayer wants to contribute to a charity that currently does not accept cryptocurrency. The donor-advised fund can act as an intermediary to convert the cryptocurrency to US dollars in a tax-free transaction to facilitate the transfer to your desired charitable organization. Note that deductions for donations of cryptocurrency to a donor-advised fund are limited to 30% of a taxpayer’s adjusted gross income. Any excess amount that is not deductible in the year of donation will be carried forward on the taxpayer’s return for 5 years.
Keep in mind that because cryptocurrency is property in the eyes of the IRS, donations of over $5,000 will require a qualified appraisal, even if the cryptocurrency is actively traded on an exchange. Taxpayers considering a cryptocurrency contribution of over $5,000 should consult with their tax adviser regarding the substantiation and appraisal requirements. It should be noted that since individuals are cash basis taxpayers, transactions will need to be completed by December 31st to obtain a current year tax benefit.
If you have any questions about contributing cryptocurrency to a donor-advised fund or charitable organization, the team at Wolf & Company is here for you! We wish you a happy and healthy holiday season.
How Can We Help?
For more information or if you have questions, please reach out to the following Wolf team representatives:
RYAN P. BRUNELL, CPA, MST
Principal
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1 (617) 933-3348
[email protected]
KAYLEE H. WOLD, CPA
Tax Manager
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1(617) 428-5400
[email protected]
CODY D. BELLAND, CPA, JD
Tax Manager
Wolf & Company, P.C.
255 State Street, Boston, MA 02109
Direct +1(617) 261-8140
[email protected]
