As 2021 comes to a close, it’s time for everyone and organizations to consider end-of-the-year tax planning. However, people that made crypto donations to charities this year are eligible for some tax benefits which we will discuss as we proceed. Cryptocurrencies have been performing high this year, especially Bitcoin. Other cryptos like Ethereum have also witnessed a considerable increase this year. 

For those who might want to donate to charities, crypto investments like Ethereum and Bitcoin held over one year might present an excellent opportunity to use your highly appreciated assets to make a maximum impact. 

Donating long-term crypto investments can unlock extra funds for charitable organizations in two ways. You can potentially remove the capital gains tax you’d get if you sell the assets yourself and donate the funds, increasing the amount the charity can get by 20 percent.

Suppose you opt for itemized deductions rather than taking the standard deduction on your tax return; you might claim a decent market value deduction for your charity contribution that tax year. You can also donate the savings to the charitable organization again. 

As a taxpayer holding highly appreciated crypto, you might have considered the best way to donate to charities.  We’ve outlined the tax benefits of donating cryptocurrency and other tax considerations for charities and donors. Suppose you’ve decided to donate Bitcoin to charity; all you need to know will be explained here. Let’s get right to it!

Deduct the Full Value of an Appreciation Asset With Crypto Tax Benefits

In the US, crypto is in the same category as property, which gives it a different status from cash. The Internal Revenue Service (IRS) allows people to make donations of property without any tax liability once they’ve owned the property for more than one year. 

By donating crypto that you’ve owned for over a year, you can write off the fair market value of the property you donated. If you’ve held the coins for less than a year, you’ll have to pay tax on your short-term gains. 

Suppose the charity you wish to donate to doesn’t accept crypto; you might have to exchange your coin for cash, thereby getting a capital gains tax. For donations that are more than $5000, the receiving charity and the donor will have to file IRS Form 8283 to recognize the donated property that’s more than that value. 

There’s another best way to do this for crypto holders interested in making subsequent donations or donating huge sums. You can hold the coins but give the capital gains while it gains value, thus continuously allowing you to donate while retaining a growing asset. 

Off-ramping crypto into cash for making a charitable donation is pretty costly; hence some cryptocurrency holders are disenchanted with donating to charity. Charities that haven’t introduced crypto donation are missing out on this market, seeing as individuals interested in creating a change but can’t off-ramp their money without significant loss in value can utilize crypto donations to support charities. 

Round silver and gold coins

Additional Tax Considerations for Donors

You’ll need to make numerous tax considerations to enjoy the tax benefits that come with donating cryptocurrency. They include:

  • Appraisal and Valuation Requirements

To discover the amount of a non-cash property donation, for instance, in crypto, you must determine the coin’s fair market value (its price at the open market). 

The fair market value is also the price that the willing buyer and seller will agree on without requiring to act on the sufficient knowledge of the pertinent facts. For cryptos traded on public exchanges, the fair market value should equal the coin price when donating. 

Suppose you donate crypto worth more than $5,000 to charity; more appraisal requirements will apply. For instance, you’ll have to get a qualified appraisal, which will be dated and signed by a qualified appraiser. 

Additionally, you must complete Form 8283, Schedule B, and include it in your tax return. The exception given to publicly traded stock doesn’t apply to crypto.

  • Substantiation Requirements

After a crypto donation to charities, you’ll need to keep relevant records as proof of the amount you gave. Substantiation requirements for payments made with cryptocurrency depend on the amount donated. 

For crypto donations under $250, you must have a receipt from the charitable organization showing the address and name of the nonprofit, the date you donated, and the amount and type of crypto you gave. 

Suppose you donated more than $250, ensure you collect a “contemporaneous written acknowledgment” after contributing the money to the charitable organization. The disclosure will include:

  • The description of the donated cryptocurrency
  • Information regarding if you received any services or goods due to the donation, except the membership benefits and token items
  • An estimate and description of the value of such services or goods if you indeed got one

Ensure you receive the acknowledgment before or when you file a tax return for the donation year or the due date for filing the return, including extensions. 

  • Itemizing vs. Standard Deduction

It’d be best if you decide whether you’ll be claiming the standard deduction or itemizing deductions. Suppose you claim the standard deduction; you won’t benefit from the charity donation deductions due to you as a crypto donor. 

  • Avoid Prearranged Sales

It’d help not to get into any arrangement that will legally incite a public charity or donor-advised fund to sell the crypto immediately after receiving it. Prearranged sales like this might cancel or reduce the tax benefits of donating cryptocurrency. 

After receiving the crypto, the public charity or donor-advised fund controls the asset. Most public charities will promptly sell the contributed crypto as a general rule. However, a charitable organization might reserve the right to sell the cryptos at any time. 

  • Donate Before Selling

To maximize the possible tax benefits that come with crypto, you’ll need to transfer your appreciated crypto that you’ve held for over one year to a public charity or a donor-advised fund instead of selling the crypto and donating the cash.

Encourage Adoption and Transparency

Every early crypto adopter had always dreamed of these digital currencies becoming widespread and used by everybody daily. Presently, cryptocurrency serves as a tool to change the world and help the needy. What could be better than that?

Donors requesting that charitable organizations accept crypto donation helps to raise cryptocurrency visibility while encouraging wider adoption. As more popular charities promote crypto donations, the benefits will encourage those organizations and individuals who haven’t started accepting or sending crypto to join the trend. 

There are several benefits for charitable organizations that start adopting crypto donations early. Firstly, you can get more access to a tremendous amount of wealth than other nonprofits that haven’t incorporated that option.

Although it’s financially draining and takes time to set up a technology to enable a charity to accept crypto as donations, early adopters will benefit more from this payment method. Crypto’s nature also encourages transparency. Thus, people on the blockchain can view the number of people making donations and the organization receiving the contribution. 

A donor might know the amount a charity is getting and how they’re spending the funds. It’ll significantly increase the number of people willing to donate due to accountability and transparency. 

Crypto is still in its early stages of use and development; however, there’s no need to wait before using it for several purposes, including changing the world. Once you’re willing and ready to put in the work, accepting crypto could be your ticket to accessing the global market and opening a new stream of fundraising.

Close up view of a golden coin

Track How Donations are Used

The reason people are beginning to prefer crypto is due to its transparent and immutable nature. Once you’ve completed a transaction, you can never alter it. It’ll forever exist on the digital, decentralized ledger: the blockchain. 

Thus, it’s unlikely for unscrupulous charities to misuse funds or outrightly scam donors. Some people are always looking to take advantage of generous persons, so it’d be best if you stay wary of charity scams and other unofficial charitable organizations looking to accept donations. 

Crypto makes tracking funds sent to a charitable organization easy, seeing as everyone on the blockchain can see the transactions. Once you donate crypto to charities, they can easily track the coins and see their usage. 

However, some crypto transparency ideas aren’t practical, seeing as most charities that accept crypto immediately change them to fiat currency. Thus, you can track the donated cryptos to their usage until their exchange to the local currency. 

On the other hand, charitable organizations can work with donors’ desire to ensure transparency by receiving crypto donations and tagging funds for a particular project according to the donor’s wishes. Suppose charities use the crypto for a while rather than off-ramping to fiat currency immediately after receiving the donations; it’ll help donors track those coins and discover the projects they supported. 

Blockchain technology’s transparent nature can potentially make donors trust charities more than ever. Donors won’t only feel safer donating funds to charities; they’ll also enjoy tracking their funds and seeing their usage for the project progress. That way, charitable organizations can connect more with donors, strengthen their relationships and carry donors along while implementing the funded projects.

Final Words

Blockchain technology and cryptocurrencies have been on the headlines for a while now. Suppose you’re a charitable organization and have been wondering about the importance of adopting crypto donations for raising funds to finance your projects. In that case, we hope you’ve gotten answers to your concern. 

There are numerous benefits of donating cryptocurrency as a nonprofit or charitable organization. You can quickly move money across borders, gain access to a larger audience, and strategically use an appreciating asset (the crypto). 

On the other hand, suppose you’re a philanthropist or someone desiring to see a change in the cause you believe in, consider donating Bitcoin, Ethereum, or another crypto to your preferred charity, such as Food for Life Global (FFLG). FFLG is an international hunger relief organization committed to serving vegan freshly cooked meals to school children and people affected by war and natural disasters. 

Crypto is steadily gaining more public awareness and popularity, making it a great tool to help achieve social good. Presently, it’s becoming easier for people to make crypto donations seeing as many charitable organizations have started accepting it as a medium for contributions. 

Cryptocurrencies like Bitcoin can become a positive force for making a considerable difference in the world. However, it’d be best to donate to charities that will hold it for a while rather than cashing it out for their short-term gain. That way, you get to enjoy some benefits as a crypto donor.

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