Last month, the United States Congress increased the tax benefits of charitable giving in the CARES Act in hopes that people will give more. Some give money; others give property; and a growing number have been giving crypto assets.
Once you have made the difficult decision of which charity or cause to donate to, your focus should shift toward your tax position. There are certain things to keep in mind when giving crypto assets — particularly considering how their volatility can affect your taxes and decision making.
Which crypto asset do I gift?
Generally, giving a gift of crypto does not trigger a taxable event to the donors or to the recipients. Thus, after donors decide how much they wish to give, they must also decide which assets to give. Donating assets with a low tax basis can reduce or minimize future taxable income, as the donor retains assets with a higher tax basis. Entities that are exempt from U.S. tax due to their educational, charitable or other activities (“charity”) are often indifferent toward the tax basis of the assets they receive. This is because they are normally exempt from taxes on gains from assets sold to fund their charitable activities.
If the recipient of the gift is not exempt from U.S. tax — i.e., a “non-charity” — they will likely care about the tax basis of the asset given to them. This is because the donor’s tax basis on gifted assets often — but not always — transfers to the non-Charity. Thus, if the donor wishes to prioritize their own tax position over the non-charity’s, the donor will give crypto with the lowest tax basis. Conversely, if the donor wishes to prioritize the benefits of the gift to the non-Charity, they will give crypto with the highest tax basis.
Does my crypto gift have a built-in loss?
Crypto assets have a built-in loss because their tax basis is higher than their current market value; therefore, a donor may wish to sell the crypto for cash (to realize a capital loss) and then give that cash to a charity or non-charity. The donor can use this capital loss to offset tax on any capital gains they may have while transferring the same value to the charity or non-charity.
If a donor gives a gift of crypto with a built-in loss to a non-charity, the potential tax deduction from the built-in loss is lost. This is because the general rule that transfers the donor’s tax basis to the gift recipient does not apply in the case of built-in-loss assets that a gift recipient sells for a loss. Rather, the tax basis of the property sold by the gift recipient is limited to the fair market value of the assets at the time of the gift.
Will I receive a charitable deduction?
Individuals who itemize deductions may be entitled to a deduction for gifts of crypto they make to certain charities. Entitlement to the deduction is given when an individual’s itemized deductions exceed their standard deduction — i.e., $12,400 for single taxpayers and $24,800 for married taxpayers. However, even if an individual does not meet these thresholds, they may be entitled to a deduction of up to $300 as a result of the CARES Act enacted in March. The act also reduced other limitations on an individual’s ability to take a deduction for charitable contributions.
Often, the amount of a charitable deduction is based on the fair market value of the crypto asset at the time of donation. However, if an individual donates either crypto assets with short-term gains (less than one year) or crypto that would give rise to ordinary income if sold, then the taxpayer’s charitable deduction is reduced by any appreciation in the crypto. This can limit a taxpayer’s charitable deduction to the tax basis of the crypto given.
Does my charity or non-charity of choice accept crypto?
More and more charities are partnering with crypto payment/donation platforms, such as BitPay, Coinbase Commerce and The Giving Block to facilitate donations made in crypto. Although many of the largest charities already accept donations made in crypto — e.g., United Way, American Red Cross, No Kid Hungry — only about 2% of all nonprofit organizations in the U.S. and Canada have been reportedly doing so.
For those who still want to donate crypto assets to organizations that do not accept them, one option may be a donor-advised fund, also known as a donor fund. One of the largest donor funds in the U.S. is Fidelity Charitable. It accepts donations in Bitcoin (BTC), Bitcoin Cash (BCH), Ether (ETH), Litecoin (LTC) and XRP. As Fidelity Charitable and other donor funds are charities, the same considerations outlined in this article apply when contributing to these funds.
After receiving the donated crypto, the donor fund is able to sell the crypto for cash without having to pay tax. The whole fiat value — net of fees — of the crypto that is sold is able to grow in the donor fund or be donated to any charity of the donor’s choice (hence the donor-advised reference). Although donor funds have funding/donation minimums, they can provide additional options for those looking to make donations with their crypto holdings. Fidelity Charitable, alone, since 2015 has received $100 million in cryptocurrency donations, according to its recently published “2019 Giving Report.”
After deciding which charity or non-charity deserves your gift, your own tax position may deserve some thought as well. Although there are some twists and turns in the thought process, it all starts by asking some basic questions around whether the crypto you are giving has appreciated or depreciated and the nature of the gift’s recipient. Thinking about both tax and non-tax considerations of a gift can maximize the overall benefits to the donor and the recipient, or at least put the donor in control of striking the right balance.
This article is for general informational purposes only and should not be treated as providing advice on the tax, accounting or other treatment of a transaction or activity. Please consult an appropriate advisor if you would like such advice.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cryptox.
This article was co-authored by Roger Brown and Rachel Walker.
Roger Brown is the head of tax and regulatory affairs at Lukka. He has more than 27 years of experience as an international tax and financial products lawyer. He spent a decade at the national office of the Internal Revenue Service, writing regulations and other guidance, and prior to Lukka, he spent a similar period of time as a partner at Ernst & Young’s financial institutions and products office. After being tasked to be the lead international tax partner on a number of EY’s largest banking, insurance and other capital markets clients — often bridging the intersection of tax and capital markets regulations — Roger became one of the company’s leaders in the fintech and blockchain space.
Rachel Walker is a product manager at Lukka Library — a database of academic papers that confront controversial legal and tax questions regarding crypto. Prior to joining Lukka, Rachel was a business analyst at ION — a computer software company that delivers workflow automation software. Rachel graduated with a Bachelor of Arts in Mathematics from Boston College.
