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What to learn about making cryptocurrency donations to charity

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The crypto ecosystem has expanded significantly in recent years. As institutions like the IMF begin to welcome his innovation, they are also urging investors to exercise caution.

Jakub Porzycki | NurPhoto via Getty Images

Cryptocurrency donations to charity are booming, and gifts still roll in when the calendar runs out.

On Crypto Giving Tuesday, a campaign launched by The Giving Block, a crypto donation and fundraising platform for nonprofits and individuals, there was a 583% increase in digital asset donations in 2021 compared to 2020.

On Crypto Giving Tuesday 2021, the Washington, DC-based company processed $ 2.4 million worth of gifts with an average donation of $ 12,600, according to the company, and donations continued through the Christmas season.

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“That day inspired hundreds of conversations with high net worth donors, companies and projects interested in gift giving,” said Pat Duffy, co-founder of The Giving Block.

And other companies have seen similar growth in digital currency philanthropy.

“We saw an increase nearly five-fold from 2020 to 2021,” said Tony Oommen, vice president and nonprofit planning advisor of Fidelity Charitable, a 501 (c) 3 organization that accepts digital currencies through its donor-recommended funds, a nonprofit Investment account for future gifts.

One reason for this could be the unprecedented growth in some assets over the past year, he said. For example, the price of Bitcoin has increased by almost 70% since early 2021.

However, some data suggests that digital currency owners may be more generous than other investors.

According to a Fidelity Charitable study, about 45% of cryptocurrency owners donated $ 1,000 or more to charity in 2020, compared with 33% of all investors.

“I think people who are often young and idealistic are getting transformative capital for the first time,” said Duffy, explaining how this can create a desire to give back.

While taxes aren’t the main motivator for gifts, there’s still time to get a write-off in 2021, experts say. Here’s what you should know before making a year-end crypto donation to charity.

Tax treatment

Cryptocurrency is owned in the eyes of the IRS, which means it can be subject to capital gains tax if sold or exchanged for a profit, and length of ownership can affect prices.

If you hold a digital currency for more than a year, you can achieve long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income.

However, regular income taxes may be incurred on assets owned for less than 12 months, up to 37% for high earners.

Taxed is the difference between the purchase price, also known as the base, and the value of the asset when it is sold, exchanged or used to buy.

However, someone can bypass profit taxes by donating cryptocurrency to charity, and those who break down deductions can qualify for a write-off.

“Make sure you held up [crypto] for more than a year if you want a fair market value deduction, “said certified financial planner Leon LaBrecque, chief growth officer of Sequoia Financial Group in Troy, Michigan, who also works with Ronald McDonald House in southeast Michigan Accept crypto donations.

Make sure you held up [crypto] for more than a year if you want a deduction in line with the market.

Leon LaBrecque

Chief Growth Officer at Sequoia Financial Group

Donors can deduct the fair market value of a profitable asset up to 30% of their adjusted gross income if they hold it for more than 12 months, he said.

Of course, someone with a higher adjusted gross income can get a bigger tax break, said Ryan Losi, a Richmond, Virginia-based public accountant and executive vice president of accounting firm PIASCIK.

If gifts exceed 30% of Adjusted Gross Income, they can bring the excess withholding forward up to five years, he said.

For example, let’s say a person’s adjusted gross income is $ 100,000 in 2021. If you donate $ 50,000 to Bitcoin by December 31, you can withdraw up to $ 30,000 this year and potentially write off the remaining $ 20,000 over the next five years.

However, smaller crypto gifts can also offer future tax breaks.

If someone plans to give $ 1,000 in cash, they can donate that amount in crypto and use the money to buy back their position, said Matt Metras, a registered cryptocurrency agent and tax specialist at MDM Financial Services in Rochester, New York .

“You have effectively increased your base,” he said, increasing your purchase price to the new value and lowering future royalties if the asset continues to grow.

“It just comes down to how it taps into the bigger picture of your crypto holdings,” he said.

Qualified assessment

While the tax treatment for the allocation of cryptocurrency or other assets is “almost the same”, according to Metras, there is one important difference.

“If you’re donating more than $ 5,000, all you need to do is get a qualified estimate,” he said, and prices can range from $ 100 to $ 600.

If you donate over $ 5,000 all you need to do is obtain a qualified estimate.

Matt Metras

Tax specialist for cryptocurrencies at MDM Financial Services

The cost of valuation can play a role in making decisions about choosing the right asset, Oommen said. “It’s almost like a math problem.”

For example, let’s say someone has $ 2,000 growth in digital assets and the valuation costs $ 500. If they only expect a $ 200 write-off, the donation may not provide any net financial benefit, he said.

However, the evaluation can take place after the donation. Donors have until their tax return expires, but must submit a Cashless Donation Form 8283 with their tax return in order to claim the deduction.

Void in crypto wash sales

While cryptocurrencies with built-in profits can be attractive to donate, a losing position changes strategy, experts say.

If crypto goes down, it may be better to donate other profitable assets that are held for more than a year, Losi said.

Someone can sell digital currency at a loss to offset other gains, buy back the same asset to keep exposure, and get another valued investment for free.

“This is really the kind of game I made because I knew crypto had made a leap in the past 30 days,” added Losi.

Currently, digital assets are not subject to so-called wash sale rules, a measure that prevents someone from selling lost assets and buying back the same investments within 30 days before or after the sale.

Despite House Democrats trying to fill the void in crypto wash sales as of December 31, Senator Joe Manchin told DW.Va. he would not vote for Build Back Better and stopped the current version of the spending package.

Tips for crypto donations

Some digital currencies have a security feature known as “whitelisting” that only allows withdrawals to be made to specific addresses, Duffy said. Adding these permissions can take a few days.

“If you want your crypto donation to reduce tax liability for 2021, whitelist addresses now,” he suggested.

And while more and more nonprofits are accepting cryptocurrencies, if a preferred charity doesn’t, donors can use a third-party platform to deliver the gift.

“A fund recommended by donors can be used in the front end to process the gift and convert it into cash so the charity can use it for their mission,” Oommen said.

In addition, someone giving a bigger gift can use a platform for personalized services, such as: B. Advice to recognized non-profit organizations, tax advice and appraisals.

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