Published on March 26th, 2022 | by Matt Casadona0
Why You Should Consider Donating Crypto To Charities?
If you want to find a new way to invest in charities, consider cryptocurrency. Crypto, such as Bitcoin and Ethereum held for more than twelve months, can offer you and charities a unique opportunity to use these assets to help charities earn more money over time. In addition, donating cryptocurrency can help charities get more money by eliminating the capital gains tax.
Benefits of Donating Crypto to Charities
If you’re self-employed and itemize deductions on your tax return, you can also take a fair market value deduction for the year and pass those savings on to the charity to donate even more. When donating to charities, you should consider whether or not they have the resources and expertise to process and deal with cryptocurrency. These gifts can involve financial planning, but there are many reasons to donate crypto to charities. Here’s what you need to know about donating crypto to charities.
Donate Before Selling
Most people will sell cryptocurrency and use the money earned to donate to charities. However, doing it this way may mean less money going to charity. If you want to maximize the tax benefits of donating crypto, you should transfer your crypto directly to the charity. Your crypto should be held for more than one year. Remember to donate directly to a donor-advised fund or another charity.
Selling your crypto and donating the cash means your charity might have to pay taxes on the donation. They also won’t see the benefits of crypto assets that have appreciated over time. Your donation can build value for the charity over time by directly donating crypto, helping them earn more money with little to no effort.
Avoiding Prearranged Sales
Charities should not be required to dispose of the crypto after you donate it. A prearranged sale could eliminate the tax benefits of donating cryptocurrency. Instead, the donor-advised fund or charity should fully control the asset after you donate it. Unfortunately, for most charities, the policy is to sell cryptocurrency immediately, but they may also be able to sell at any time. If you’re not sure what your chosen charity’s policy is, you can always ask. If you want to ensure that a charity gets the most out of your donation, always ensure they retain the right to sell the crypto whenever they want.
Investors may bypass taxes on profits by donating crypto to charity for a write-off. The IRS doesn’t recognize the gift of crypto to a charity, so crypto is treated as capital assets or income rather than donations. If cryptocurrency was held for more than one year, investors could itemize the deductions up to 30% of the adjusted gross income. If the cryptocurrency was held for less than a year, you could deduct the lesser cost at the time of the charitable contribution.
Ultimately, long-term assets can help you avoid the capital gains tax while deducting the asset’s fair market value. However, if you don’t have appreciated assets, you can still donate short-term assets to avoid the capital gains tax and deduct your cost.
People enjoy the transparent nature of crypto; once you’ve completed a transaction, it can never be altered and exists on the blockchain. As a result, it’s unlikely for charities to be able to misuse funds or scam donors into handing over their cryptocurrency. You can also easily track your charitable contributions and see how the charity uses its funds. Of course, many charities immediately change crypto to fiat currency after the donations.
Donors can also work with charities by tagging funds for specific projects. This transparency can also help donors trust that their donations are being put to good use. Donors will be more likely to donate when they know their money is going to a good cause, allowing charities to communicate better with donors and strengthen the necessary relationships.
How to Donate Crypto to Charity
Most charities cannot accept cryptocurrency directly because setting up a digital wallet is complex. If you set up a wallet for the charity, you might not be able to call it a donation because you’ll still have access and hold the keys. Instead, a charity can accept cryptocurrency domains through a donor-advised fund or third-party platform. Many platforms facilitate the donation process to charities for a small fee.
A donor-advised fund can accept crypto donations and convert them to cash for the non-profit so that you can claim a tax deduction.
Because the IRS classifies crypto as property, it will have to be appraised. For donations over $5000, you will need to have an appraisal on the value donated so you can claim the correct amount on your tax return. When donating to your charity, you’ll need to factor in the appraisal cost. If you find that the appraisal cost is too high, you might choose to donate another type of asset that makes better financial sense.
Should You Donate Crypto to Charities?
More charities are accepting crypto donations than ever before, and this trend is likely to continue as crypto becomes more mainstream in today’s world. Donating crypto to charities can help the charity earn more money in the long run, but many charities immediately sell their donated crypto. Before you donate, talk to the charity to see what they’ll do with the crypto and how it will be used. If you believe they’ll sell it immediately, there might not be any benefits for the charity, and you may choose to donate in fiat currency instead.
If your goal is to help a charity, you should only donate to charities that know how to use cryptocurrency donations and earn a higher investment return. However, if your goal is to use donations for tax deductions, it might be cheaper to donate cash to avoid the appraisal fees.
Luckily, donating crypto to charities is more accessible thanks to a number of platforms that can simplify the process for you while ensuring you can take advantage of the tax exemptions.
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