Donations to charity are more than just acts of kindness; they can also enable you to save money on your taxes. Donating cryptocurrencies that have risen in value can allow you to bypass capital gains taxes, reduce other taxes, and aid the charities that matter most to you. It’s a mutually beneficial situation for both investors and charitable causes.
Why Donate Crypto?
Assume you bought $150 worth of Bitcoin a couple years ago, and it has now increased to $300. You owe $45 in capital gains tax on the amount at the long-term capital gains tax rate of 15%. You might give the Bitcoin to get a $300 tax credit against your other tax responsibilities while also avoiding $45 in capital gains taxes—a win-win situation.
The most crucial limitation is that if you gift cryptocurrency held for less than a year, you must still pay capital gains taxes. Furthermore, you may only deduct the cost basis of the crypto asset, not the entire amount. As a consequence, to optimize your tax incentive, you should only give crypto assets that you’ve owned for more than a year.
How to Donate Crypto
Begin by finding the charity you’d prefer to give to and ensuring that they are tax-exempt organizations. To determine their status, the IRS offers an easy search tool. Furthermore, you should confirm that the organization offers a certificate which includes their name, location, date of donation, and the amount that’s been donated.
The next step is to decide which crypto assets to gift. In most circumstances, donating your assets that have risen most in value will save you the most capital gains tax. To minimize capital gains taxes, you must gift the crypto asset in its original form. A taxable event will occur if you convert the crypto asset to cash or trade it for another currency.
The majority of crypto contributions are done through a wallet-to-wallet transfer or through systems that function similarly to merchant accounts, like Coinbase Commerce. Because blockchain transactions are often irreversible, you should double-check to confirm that you’re transferring bitcoin to the proper address when contributing a gift.
The final stage is to declare your gifts on Form 1040 Schedule A, Itemized Deductions. If the gifts exceed $500, you must additionally record the sum on Form 8283 Section A under Noncash Charitable Contributions. If they are worth more than $5,000, you must fill out Form 8283 Section B and receive a competent assessment.
Donating NFTs & Other Considerations
Donating cryptocurrency is a simple process: the asset’s worth is equal to the market value at the moment of transference. However, determining the value of illiquid assets is far more difficult because the market price is less obvious. The value of an NFT, for example, is determined by a single buyer’s evaluation rather than a market price.
The simplest way to value these assets is to auction them off and donate the earnings to charity. However, the auction is a taxable event, and you would not be exempt from capital gains tax. Hiring a professional appraiser to attest to the value is usually the best option, albeit excessive sums may result in a tax audit.
Please bear in mind that charity contributions are simply one of several tax-cutting techniques. Tax loss harvesting, for example, is another common approach to decrease your tax burden. You can counterbalance other capital gains across your portfolio and reacquire the asset to preserve allocations by realizing losses in the current year.
Other Ways to Cut Taxes
Donating bitcoins is a wonderful approach to minimizing capital gains taxes while also helping the causes that are important to you. However, it is not the only way to reduce your tax liability. Donations should be one of several techniques you employ to boost your after-tax crypto earnings.
Other techniques to lower your tax bill include:
- Using the appropriate accounting procedure. Select an accounting system that produces the most protracted capital gains, such as FIFO. In this manner, you will mostly pay long-term capital gains taxes rather than the short-term rate.
- Take into account tax loss harvesting. Tax loss harvesting is the practice of selling losing holdings before the end of the year in order to realize the loss. These losses can be used to offset gains in other areas of your portfolio and lower your year-end taxes.
- Subtract any expenditures. Professional traders and crypto miners may be allowed to deduct some of their crypto-related expenditures. Crypto miners, for example, may normally deduct their gear and power expenditures. Working with an accountant or other tax expert to optimize your deductions is also a smart idea. They may examine your unique circumstances and recommend strategies to cut taxes on all of your assets and income streams.
In terms of sheer scale and scope, crypto assets are valued more than $1 trillion, surpassing many areas of the financial markets. On the other hand, the taxation of crypto assets has become a source of contention. The good news is that donating crypto assets is both simple and lucrative, making it an essential component of any tax plan.