As the holiday season approaches, many individuals contemplate charitable giving as a way to spread goodwill and support causes they are passionate about. In recent years, cryptocurrency donations have surged in popularity, marking a significant shift in how people contribute to charity. However, while this innovative form of giving offers potential tax benefits, there are multiple considerations and challenges that donors should keep in mind.
Fidelity Charitable has reported a dramatic increase in cryptocurrency donations in 2024, with a staggering $688 million accepted through mid-November, primarily in Bitcoin. This stands in sharp contrast to the mere $49 million received in all of 2023, showcasing not just a rise in crypto philanthropy, but also an increasing acceptance of these digital assets in the charitable sector. As more people accumulate wealth in cryptocurrencies, they are looking for effective means to leverage this wealth beyond traditional cash donations.
Donating cryptocurrency is akin to giving away other forms of property, yet, as certified financial planner Juan Ros points out, it is fraught with complexities. The 2018 tax reform, which raised the standard deduction, has made claiming itemized deductions for charitable gifts more difficult, including those for medical expenses and state taxes. However, individuals who itemize may find substantial tax advantages in donating appreciated assets like cryptocurrency rather than cash. This is primarily because crypto donations allow one to bypass capital gains taxes, claiming the fair market value as a deduction if held for over a year.
As a case in point, cryptocurrency, particularly Bitcoin, has shown impressive growth, with its value soaring 120% year-to-date. Thus, donating crypto not only provides a means to maximize tax deductions but also enhances the impact of one’s charitable contributions.
Despite the growing trend of donating cryptocurrencies, it’s essential to note that not all charities are prepared to accept crypto donations. As of the beginning of the year, only 56% of major U.S. charities were open to such gifts, as reported by The Giving Block. This figure has risen from 49% the previous year, indicating a gradual acceptance of digital currencies in philanthropy. Nonetheless, prospective donors must reach out to their chosen organizations to confirm acceptance policies before proceeding with a donation.
On the other hand, donor-advised funds represent a more established avenue for crypto donations. These funds serve as a charitable investment account, allowing donors to take an upfront deduction while transferring funds to eligible nonprofits at a later date. Many donor-advised funds are equipped to handle crypto donations, and they have the infrastructure to manage the sale of crypto and reinvest the proceeds. However, some funds may also allow donors to maintain their holdings in digital assets, presenting additional flexibility.
One of the notable challenges of donating cryptocurrency lies in the documentation required. When donating assets worth more than $5,000, additional documentation is mandated by the IRS. For high-value donations, donors must file Form 8283 with their tax returns, including a qualified appraisal that adheres to specific IRS guidelines. This appraisal requirement can create additional burdens for donors who are not familiar with the intricacies of tax regulations. For instance, donations exceeding $500,000 necessitate a detailed appraisal furnished with the tax return, a step that could complicate the giving process and may deter some investors.
As the landscape of charitable giving continues to evolve, cryptocurrency presents a compelling option for those looking to maximize their donations while enjoying tax benefits. While the surge in crypto donations signifies a promising trend, aspiring donors must navigate potential hurdles, including cryptocurrency acceptance by charities, tax documentation, and understanding the implications of their donations. In light of these considerations, it is prudent for donors to conduct thorough research and consult with financial or tax professionals to ensure a smooth and rewarding charitable giving experience this holiday season. Embracing this new frontier can help not just in personal fulfillment but also in making a meaningful impact in the community.