02.16.2018 | Investopedia
Congratulations. You bought some bitcoin when it was worth $1,000, $100 or $10, you hodled, and now you’ve logged some pretty impressive gains. If you’re of a charitable bent, you might be wondering how best to share this windfall with your favorite 501(c)3. You probably have a few questions first, though.
Bitcoin or Cash?
First of all, what form should your donation take? Should you sell your holdings for U.S. dollars or donate bitcoin – or another cryptocurrency – directly?
Bitcoin’s price is extremely volatile. Wallets and exchanges used to hold the cryptocurrency have a history of being hacked. Compliance is tricky. Regulators have yet to catch up, and the regime they’ll eventually settle on is anyone’s guess. For these and other reasons, your average charity probably prefers donations in fiat currency.
But Evan Fox, a manager in the tax department at Berdon LLP, argues that making your donation using bitcoin is preferable to cashing out. “Let’s say you bought [bitcoin] for $1,000 and it’s worth $10,000. Now if you were to sell it, you would have $10,000 in cash. You would have recognized a $9,000 gain.” Depending on your jurisdiction, “taxes on that could be 35%, if not slightly more. So if you take 35% off $10,000, you’re left with $6,500 in cash.”
If you give directly in bitcoin, on the other hand, your donation will be tax-free, and not even the steepest fees paid to miners and payment processors such as BitPay could bring the value of the donation down as much as taxes would. The price of bitcoin could drop steeply, but few charities are likely to hold donations in the form bitcoin for very long.
How Do the Taxes Work?
The Internal Revenue Service (IRS) classifies bitcoin and other cryptocurrencies – there is no difference between zcash, bitcoin, ether and litecoin for tax purposes – as property, meaning that cryptocurrency donations are tax-deductible. If the recipient is a public charity, the deduction is capped at 30% of your adjusted gross income (assuming that selling the property would result in a capital gain). If it is a private foundation, the cap is 20%. Holding periods do not affect these deductions.
The question is exactly what kind of documentation is needed to claim these deductions. Property donations are reckoned in terms of fair market value, which is easy enough to determine for bitcoin and other major cryptocurrencies. CoinDesk’s bitcoin price index is widely followed and accepted, for example.
Fox points out, however, that for donations above $500, donors are required to file a form 8283. The rules around this form require a qualified appraisal for donations above $5,000, unless the donation qualifies as a marketable security or any of a slew of other exempt properties (check out §1.170A-13(C)(7)(xi)(B) if you’re curious).
“I like to think that it’s very obvious to say that your bitcoin would qualify, that you would not need a qualified appraisal,” says Fox, but until the IRS provides further clarification, it might be worth spending a small sum on “just having a qualified appraiser write down the facts that everybody knows.”
Does the Charity Accept Bitcoin?
These concerns only come into play if the charity you’re giving to actually accepts bitcoin donations. Chances are they don’t – few do – unless the price is right. If you want to donate $100,000 of bitcoin or even a relatively obscure altcoin – Neo or Quantum – “most charities have a point where, if the numbers are big enough, they’ll make it work.”
If you’re considering a donation in the tens or hundreds of dollars, on the other hand, it’s best to restrict your donations to charities that already accept cryptocurrencies. This list is far from exhaustive, but below are a few examples:
United Way is an umbrella organization encompassing a number of 501(c)3s operating in several countries, with goals ranging from improving education to expanding access to healthcare. Bitcoin donations benefit the Innovation Fund, which is focused on technological solutions. You can donate bitcoin to the organization here.
Wikimedia Foundation is a 501(c)3 that maintains Wikipedia and a number of related projects, including Wikimedia Commons and Wiktionary.
Open Medicine Foundation
Open Medicine Foundation is a 501(c)3 that conducts research on complex diseases. It made headlines in early February when it received a bitcoin donation worth $5 million from the Pineapple Fund, an anonymous donor that has pledged to give 5,057 bitcoin to charity.
The Internet Archive, a 501(c)3 that preserves digital artifacts for posterity and provides the Wayback Machine, is another beneficiary of the Pineapple Fund’s largesse (most of the charities listed here are).
Watsi is a 501(c)3 operating a crowdfunding platform where you can fund individual procedures for individual patients across the globe.
Human-I-T is a 501(c)3 founded to bring technology and internet access to low-income individuals and households.
The Water Project
The Water Project is a501(c)3 founded to provide access to clean, reliable drinking water in sub-Saharan Africa.
Give Directly provides unconditional cash transfers to people living in extreme poverty.
Professional Transformation Sports Development (PTSD) is a 501(c)3 that gives veterans suffering from post-traumatic stress disorder an outlet and sense of community through outdoor recreation.
Wild Me is a 501(c)3 that uses artificial intelligence and other technologies to combat extinction.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not have a position in any cryptocurrencies.