Bitcoin and other cryptocurrencies can be donated to charity, just like stocks and other property. Donating cryptocurrency can, however, be a little more complicated.
Donating Bitcoin directly to charity can avoid capital gains taxes yet yield an itemized charitable … [+]
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Donate Directly to Avoid Capital Gains Taxes
Taxpayers can avoid having to pay capital gains taxes yet still claim the full donation as a charitable deduction if they donate the Bitcoin directly to the charity.
Capital gains is the difference between the purchase price (the basis) and the selling price.
If a taxpayer sells Bitcoin and donates the after-tax cash to a charity, the capital gains will be subject to short-term or long-term capital gains taxes, depending on how long they held the Bitcoin before selling it. If they held the asset for at least a year, long-term capital gains tax rates of 0%, 15% or 20% will apply, depending on the amount of taxable income. Short-term capital gains are taxed as ordinary income with tax rates of 10% to 37%.
Taxpayers can claim a charitable deduction based on the amount of cash donated, if they itemize deductions. Otherwise, they are limited to the $300 (single) or $600 (married filing jointly) above-the-line charitable deduction under the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
If a taxpayer donates the Bitcoin directly to the charity, instead of selling it first, they can avoid paying capital gains taxes on the donation, just like donations of appreciated securities.
Taxpayers can claim a charitable deduction based on the fair market value of the Bitcoin, if they held the Bitcoin for at least a year and itemize deductions. Donations worth more than $5,000 must get a qualified appraisal. The charitable deduction is limited to 30% of income, but excess deductions may be carried forward for up to five years. The taxpayer may have to file IRS Form 8283 (instructions) for donations of Bitcoin.
Donations of Bitcoin are not eligible for the $300 or $600 above-the-line charitable deduction, since the above-the-line deduction is limited to cash donations.
How to Donate Cryptocurrency to a Charity
Most charities are not able to accept direct donations of cryptocurrency, due to the complexity of setting up a digital wallet.
If the donor sets up a wallet for the charity and still holds the keys to the wallet, it might not satisfy the requirements to be considered a donation.
Instead, a charity can accept donations of Bitcoin through a third-party processor or through a donor-advised fund.
Third-party processors, such as Crypto for Charity, facilitate donations of cryptocurrency to charities for a small transaction fee, typically 1%. The processor converts the donation to cash on behalf of the charity.
For example, the Center for Excellence in Education (CEE), a 501(c)(3) charitable organization that sponsors science and math programs and competitions for high school students and teachers, recently started accepting donations of Bitcoin and other cryptocurrencies through Crypto for Charity.
A donor-advised fund that accepts donations of Bitcoin, such as the Fidelity Charitable Gift Fund, will convert the Bitcoin to cash and invest it. The donor can claim an immediate charitable tax deduction and later recommend eligible charities to be supported by their gift.
Tax Rates for Cryptocurrencies
If the cryptocurrency has been held for at least a year, long-term capital gain tax rates apply.
Mark Kantrowitz
If the cryptocurrency has been held for less than a year, ordinary income tax rates apply.
Mark Kantrowitz
