Edited version of this article was published in the Puget Sound Business Journal on March 8, 2019. Subscribers of the Puget Sound Business Journal can view the article here.
Let’s say you bought some Bitcoin and its value has increased 500 percent. You decide to cash out some of your Bitcoin and then donate it to your favorite charity.
From across Lake Washington you hear your accountant yelling, “Stop! There’s a big tax hit if you cash out your Bitcoin!” Your accountant explains that the Internal Revenue Service treats the sale of cryptocurrency the same as it treats the sale of stock or personal property. That means you’ll have capital gains on the difference between what you paid and what you sell it for.
“Instead,” your accountant says, “donate the Bitcoin directly. You’ll avoid capital gains and get an income tax deduction.”
“Great,” you say, “How do I do that? Is this just for taxes, or are there other benefits to donating my crypto?”
Here’s what you need to know. Cryptocurrencies are digital assets issued and transmitted on a decentralized, immutable, public ledger known as the blockchain. Blockchain enables the creation of new digital assets, peer-to-peer trustless transactions without intermediaries, verifies the transfer of funds, and essentially provides for a digital “cash” system. There are more than 2,000 different types of cryptocurrencies (e.g. Ether, Litecoin, XRP, EOS), with more types of tokens being created for various uses every day. You can pay for goods and services using cryptocurrency, or it can be converted to “fiat” currency, such as U.S. dollars.
Back to your decision to donate your cryptocurrency. First, you must decide where you want to donate. The United Way, Red Cross, and Save the Children are the “biggies” currently accepting some types of cryptocurrencies. Also, smaller, generally tech-oriented, nonprofits make it easy to donate through their websites with a crypto-donation button. If you like a more transparent approach, you could direct your cryptocurrency to a charity like The Water Project, which uses a blockchain application called GiveTrack. That app enables the user to follow the progress of the donation through to the end. Charity Navigator, the nation’s most-utilized charity evaluator, facilitates transactions of cryptocurrency to more than 20,000 different nonprofit organizations. Finally, Fidelity has established a donor-advised fund that will accept cryptocurrency. A donor-advised fund is a charitable giving vehicle that allows donors to get an immediate charitable deduction for contributions to a managed fund. Donors can “advise” where charitable contributions go when they are distributed in the future.
With all these options, you should note that because digital tokens are often considered too volatile to hold in the charities’ portfolios, the nonprofits—almost without exception–immediately convert them to fiat through third-party exchanges, like Coinbase, Binance, and Bittrex.
Now that you’ve donated your cryptocurrency, what’s next? Of course, your tax return. Your charitable deduction is based upon the fair market value of your cryptocurrency, measured in U.S. dollars. You report that value to the IRS on Form 8283. If you give $5,000 or more, you must get a “qualified appraisal.” Currently, only a couple of companies provide these appraisals: Charitable Solutions, LLC, and Crypto Appraisers. Others likely will join them soon.
Are there non-tax benefits to donating your Bitcoin? One benefit is that cryptocurrencies are nongeographic and, therefore, are not subject to the fees and costs associated with international money transfers. This means you can give your cryptocurrency to a qualified foreign charity and it will receive more for its charitable mission. Also, tech-savvy donors are likely to favor charities providing a way to participate, as GiveTrack does.
Despite the advantages, crypto-philanthropy still faces some challenges for both donors and nonprofits. The IRS is running to keep up with its regulation of crypto-donations. The volatility of cryptocurrencies prevents charities from holding them in their portfolios, therefore missing out on any potential up-side in value. If charities do hold the crypto coins, they may find themselves hindered by donor demands as a result of transparency as the donation moves through the blockchain. Clearly, using the unique properties of cryptocurrency is a double-edged sword.
In the end, the future of crypto-philanthropy looks bright. Donors may be more willing to give cryptocurrency, especially given that a dramatic increase in value could feel like a windfall. The donation of cryptocurrency will likely open up charitable giving to a whole new generation. Rest assured that financial institutions will continue to work on creative solutions to make crypto-donations easier in the near future.