Introduction
The start of 2022 saw Bitcoin nearly double in value from January 2021, i.e., from $30,000 to an all-time high of over $68,000 in November 2021, concluding a year that saw cryptocurrencies’ phenomenal rise in popularity.
The cryptocurrency sector as a whole increased to a market valuation of more than $2 trillion. However, there is still a lot of ambiguity over Bitcoin’s taxation even a decade after its launch.
The IRS (Internal Revenue Service) has categorized bitcoin as an asset that is taxed similarly to property. For most taxpayers, the traditional route of donating to a charity is the most straightforward. However, those who own cryptocurrency may question how donating cryptocurrency can affect their tax burden.
Cryptocurrency donations can be a great way to give back to the community you love. However, to make the most of your giving with cryptocurrencies, you must understand how tax laws interact with this form of giving.
Is cryptocurrency charitable donation tax deductible?
Using cryptocurrency to make your gifts, you can improve the world while also reducing your tax and financial burden.
A cryptocurrency donation made directly to a nonprofit is not taxed, indicating that one will not be required to pay any capital gains tax. If you donate bitcoin or any other crypto, it would also qualify for a tax deduction, just like any other kind of giving/donation.
If the cryptocurrency is purchased and sold after one year, the fair market value of the cryptocurrency at the time of your gift can be deducted from the tax liability.
Why should I donate bitcoin?
According to the IRS, a gift is when you give someone something without expecting anything in return or just getting something of lower value than the item you gave them.
Are you aware that a bitcoin donation may be used to reduce your taxes? Yes, you may give cryptocurrencies to charity and get a tax deduction!
It is a fantastic method to earn a tax advantage and assist your preferred charities at the same time. And, since bitcoin is becoming increasingly popular, more charities will likely start accepting it.
So, why not take advantage of this tax break and donate bitcoin today? It is a win-win situation!
In 2021, cryptocurrency donations on Crypto Giving Tuesday surged by 583% compared to 2020.
Donating bitcoin has advantages for both donors and donees.
Bitcoin gifts are often non-taxable events in the US for the receiver (donee). The beneficiary is not required to submit any tax form. The receiver will be required to pay capital gains taxes if the gift is sold later.
For donors, if a bitcoin is donated to any charitable organization, the donor will not be required to pay any capital gains tax. Moreover, the donation made will be deductible as a charitable contribution.
What tax advantages come with donating bitcoin?
When you donate cryptocurrencies like bitcoin, you may be able to avoid paying capital gains taxes and make grants for 100% of the value to the charity of your choosing.
When charities accept cryptocurrencies, the entire value of your donation is preserved because capital gains taxes are not due.
Otherwise, long-term capital gains rates of 0%, 10%, or 20% may be levied depending on your taxable income. In addition, a bitcoin donation would be tax-deductible.
If the bitcoin is sold after one year, the fair market value of the bitcoin at the time of your gift can be deducted from the tax liability.
Tax treatment of bitcoin donations
Bitcoin donations to 501(c)3 organizations or other tax-exempt NGOs under Section 170(c) of the IRC are tax deductible.
If investors sell the bitcoin after one year of holding it, they can deduct the fair market value of their bitcoin at the time of the donation.
However, if the investor sells the bitcoin before 12 months of holding it, they can deduct lesser of the cost of the cryptocurrency or the fair market value, up to 50% of their annual gross income.
Furthermore, no capital gains tax will be levied if you donate cryptocurrency or bitcoin.
Donors must utilize form 8283, titled “Non-Cash Charitable Contributions,” to declare donations exceeding USD 500. Additionally, take a receipt from the nonprofit organization for your gift, as the IRS may require one.
If donations exceed USD 500,000, a receipt must be submitted with your tax return as verification.
However, seek advice from a tax expert for better clarity on how this works, how cryptocurrencies will be valued, and who will perform the valuation.
FAQs
1. Can you donate cryptocurrency?
Yes, cryptocurrency donations can be a great way to give back to the community you love while saving on taxes. Cryptocurrency owners can donate any cryptocurrency they hold to 501(c)3 organizations or other tax-exempt NGOs under Section 170(c) of the IRC.
2. Do you get taxed if you send someone crypto?
There is no tax on a crypto donation to a nonprofit. This suggests that you will not owe any capital gains tax. In addition, similar to other types of giving or donations, this form of contribution would be eligible for a tax deduction.
3. Can I give bitcoin as a gift?
Yes, bitcoin holders can give their bitcoin as a gift to their spouse, relatives, friends, organizations, charitable organizations, etc.
However, donating bitcoin to NGOs can serve two purposes; supporting a cause and saving on taxes.
4. How do I set up a bitcoin donation?
Typically, donating cryptocurrency involves sending money from your wallet to the recipient. Often, that will be an NGO. Most exchanges let you send money, or you may use a Web 3 wallet.
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