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Donating Bitcoin or any other cryptocurrency to charity is a noble endeavor and a win-win situation for both parties. On the one hand, those in need get potentially critical support, and you, the donor, benefit from a tax deduction on capital gains.
However, if you feel crypto generous, you should understand how Bitcoin donations work. If you fail to do your due diligence, you might lose the full tax advantage you receive from cryptocurrency donations.
Today, we take a close look at how to donate cryptocurrency without missing out on the tax benefits that come with it.
How Bitcoin Donations Work
The IRS considers cryptocurrencies to be tax-deductible property. Therefore, your contribution is subject to tax benefits if you donate Bitcoin, Litecoin, or Ether.
If you donate crypto to a public charity, you are eligible for a tax deduction of up to 30% of your Adjusted Gross Income (AGI). This condition depends on the potential gain you might receive if you sell the property instead. When you donate to a private charity, your tax deduction will not exceed 20% of your AGI.
Here’s an example that will help you understand how crypto donations work and why you should consider them:
Suppose you purchased one Bitcoin (BTC) for $1,000; today, it is worth $10,000. Therefore, you will receive $10,000 in fiat currency if you sell it. In this amount, you would have $9,000 worth of gains on which you would have to pay as much as 35% in tax, depending on your jurisdiction.
Now, if you choose to donate that Bitcoin to charity, your donation would be tax-free. In addition, the charity would then be free to exchange it into fiat currency to avoid losing anything due to the crypto market’s well-known volatility.
These are the tax deduction caps that you may be eligible for if you want to donate cryptocurrency. However, additional terms and conditions apply, and you need to understand how to navigate them to get substantial tax benefits.
Tax Deductions on Crypto Donations Explained
Donating cryptocurrency to charity is a noble gesture, regardless of how generous you are in your contribution. The process is quite straightforward, effective, and accessible. Furthermore, you can later access important tax benefits for your charitable support.
To apply for tax deductions on Bitcoin donations, you must meet these three conditions:
- Custody time
- Your Tax Deductions Choice
- Meet the AGI Standards
You must do your due diligence and research the best way to meet these terms according to your unique financial situation. You may even need a tax professional’s help understanding the tax benefits available. Here is a summary that should help you start this process!
1. Custody Time
You may be eligible for tax deductions from cryptocurrency donations in the United States if you have held those assets for at least 12 months. In this case, the total amount of deducted tax is the fair market value (FMV) at the donation time.
According to the IRS Notice 2014-21, cryptocurrencies like Bitcoin and other digital assets are considered property, so they are subject to the same laws that regulate all forms of property in the US.
When you donate a digital asset that you held for 12 months or less, the total amount of deducted tax is the lesser cost basis, which is the price you paid for it.
2. Your Tax Deductions Choice
The US Government provides two forms of tax deductions:
- Standard deductions
- Itemized deductions
The deductions differ depending on your filing status and your yearly income. In addition, US law enables you to write off some of the income fees that apply to your assets, gains, and possessions.
If single, you are eligible for a standard deduction of up to $12,200 yearly as a free default write-off.
If you are married, you and your spouse can submit a joint filing for a standard deduction of up to $24,400.
Most US taxpayers apply for standard tax deductions since they offer high write-offs and require less paperwork.
Cryptocurrency donations are subject to itemized tax deductions. Therefore, if you apply for standard deductions, you will not benefit from any tax exemptions on your crypto donations, regardless of how long you had custody of those assets before selling them.
You must apply for itemized tax deductions to get tax relief on Bitcoin donations. Also, the value of the assets you donate has to be higher than $24,400.
3. Meet AGI Standards
Opting for itemized deductions on crypto assets that you held for more than 12 months may not be enough to give you access to substantial tax benefits at the end of the year. You will also have to meet additional criteria relating to your Adjusted Gross Income (AGI), which include:
- The type of charity you choose to donate to (private or public)
- The tax choices that you make
- Multiple carry-over rules
The amount of tax returns you may receive is a particular percentage of your AGI calculated depending on the criteria above. When you donate Bitcoin, you need to consider all of these factors. While it may be a strenuous bureaucratic process, it may prove worthwhile.
Conclusion – How Bitcoin Donations Work
Cryptocurrencies are still a new addition to the property list subject to tax deductions, as seen by the IRS. The tax regulations that govern crypto donations are intricate, and they come with numerous criteria that you have to meet.
The tax benefits you may receive from Bitcoin donations depend on how long you hold the coins and your overall income. They also vary according to the type of charity you choose and the carry-over rules in the process.
If you are set on making cryptocurrency donations, your best choice is to employ a tax professional’s services. Also, doing your due diligence before applying for tax deductions will help you understand your tax benefits’ additional implications.