The benefits of donating capital assets.
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JUSTIN WOODWARDCRYPTO TAX ATTORNEY
Published on July 07, 2020
The first half of 2020 has felt like several lifetimes for many people. While the COVID-19 pandemic has caused major harm to the global health and economy, one positive outcome has been an increase in charitable giving. For cryptocurrency investors, giving to your favorite charity or cause is easier than ever through organizations like The Giving Block. The Giving Block enables cryptocurrency donations to charitable organizations. Donating cryptocurrency to an eligible charity can reduce your tax bill through the charitable deduction.
The IRS makes a distinction between a donation and a gift for tax purposes depending on who the cryptocurrency was sent to. If you send cryptocurrency to a qualified charitable organization, this is considered a donation, also referred to as a charitable contribution. If you send cryptocurrency to family, friends, or a crowdsource campaign for someone with medical bills, this is considered a gift.
Gifts and donations of property are both non-taxable transactions to the gift giver and the receiver.
This guide will explain the tax benefits to donating and gifting cryptocurrency.
DONATIONS:
Donating cryptocurrency to a qualified charitable organization is not a taxable event. Accordingly, you will not recognize income or a gain or loss from making a donation. If you held the cryptocurrency for more than a year (“long-term”) prior to the donation then you will be eligible for the itemized charitable deduction for the fair market value (FMV) of the cryptocurrency at the time of contribution, in addition to not incurring a taxable gain on an appreciated asset. If you held the cryptocurrency for less than or equal to one year (“short-term”) prior to the donation then you will be eligible for the itemized charitable deduction equal to your cost basis, and similar to donating a long-term asset, you will not incur a taxable gain on an appreciated asset.
For simplicity sake, most financial advisers will recommend donating assets in this order of preference: 1) Long-term appreciated assets first; 2) If you don’t have long-term appreciated assets then you should prioritize short-term appreciated assets; and 3) If you don’t have long-term assets or appreciated assets then last in preference should be short-term assets that are in a loss position. Each donation scenario and examples of the corresponding tax impacts are outlined below.
Example of Donation of a Long-term Appreciated Asset:
- You bought 1 BTC for $5,000 on Oct. 15, 2017
- You donated 1 BTC toNo Kid Hungryon Feb. 11, 2020 when it was worth $10,000.
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If you sold your long-term, appreciated BTC for $10,000 rather than donating it then you would incur a $5,000 long-term capital gain that you would owe taxes on. By donating it to a qualified charitable organization, you will not recognize any gain and you are eligible to deduct $10,000 in itemized charitable deductions.
Example of Donation of a Short-term Appreciated Asset:
- You bought 1 BTC for $5,000 on January 1, 2020.
- You donated 1 BTC to No Kid Hungry on February 1, 2020 when it was worth $10,000.
FMV is Greater Than Cost Basis
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If you sold your short-term, appreciated BTC for $10,000 rather than donating it, you would incur a $5,000 short-term capital gain that you would owe taxes on. By donating it to a qualified charitable organization, you will not recognize any gain and you are eligible to deduct $5,000 in itemized charitable deductions. Please note that unlike the long-term donation example above, you are only allowed to claim your cost basis of $5,000 as an itemized charitable deduction, not the FMV of $10,000. This illustrates why donating long-term appreciated assets comes first in the preferential order before short-term appreciated assets.
Example of Donation of a Short-term Depreciated Asset:
- You bought 1 BTC for $5,000 on January 1, 2020.
- You donated 1 BTC to No Kid Hungry on February 1, 2020 when it was worth $2,000.
FMV is Less Than Cost Basis
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If you sold your short-term, depreciated BTC for $2,000 when your cost basis is $5,000, you will be able to claim a $3,000 capital loss. You could then take the $2,000 you received as cash consideration and donate it to a qualified charity to receive a $2,000 itemized charitable deduction. If you were to donate the BTC directly to a qualified charity, you would receive the $2,000 itemized charitable deduction, but you would not be able to claim the $3,000 capital loss reflective of your BTC depreciating in value before donating it.
GIFTS:
Gifts, unlike donations, can be sent to anyone; there is no requirement that the gift be sent to a qualified charitable organization. Whether it be a birthday present, crowd-funding contribution, or an early inheritance, crypto sent to someone other than a qualified charitable organization falls under the category of a gift. Besides the selfless altruism of helping those in need, you can also reduce your tax liability by gifting an asset.
Example of Tax Obligations for Giver and Receiver of Crypto:
- You bought .5 BTC for $2,500 on Oct. 15, 2017
- You gifted .5 BTC to your friend, Dylan, on Feb. 11, 2020 when it was worth $5,000
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If you sold your .5 BTC, rather than sending it to Dylan, then you would have recognized a long-term capital gain of $2,500. However, because you gave the .5 BTC as a gift, your generosity is rewarded with tax savings. You, as the giver, will not have to pay the $2,500 in capital gains. The entire gift is tax-free to you and it will be as if you never purchased or disposed of the asset. There can also be benefits to the receiver of the gift if you provide them with your asset acquisition information through adopting a longer holding period and potentially adopting the giver’s cost basis.
i) Adopt the Giver’s Holding Period
If Dylan knows the date the giver acquired the BTC, the IRS allows him to adopt their holding period, which is eligible for tax-advantaged long-term capital gains rates if held for over a year. Adopting a longer holding period is tax beneficial to the receiver of the gift because a long-term holding period is always preferential.
ii) Adopt the Giver’s Cost Basis
If Dylan knows how much the giver originally paid for the gifted BTC, he may be able to adopt that amount as his cost basis. Whether Dylan can adopt the giver’s cost basis depends on if he has a gain or loss when the BTC is converted to fiat or another cryptocurrency. Specifically, the IRS states:
“For purposes of determining whether you have a gain, your basis is equal to the donor’s basis, plus any gift tax the donor paid on the gift. For purposes of determining whether you have a loss, your basis is equal to the lesser of the donor’s basis or the fair market value of the virtual currency at the time you received the gift. If you do not have any documentation to substantiate the donor’s basis, then your basis is zero.”
For simplicity sake, there are three outcomes that can occur from receiving a gift: 1) The proceeds exceed the giver’s cost basis; 2) The proceeds are less than the giver’s basis and the FMV at the time of the gift, which results in lowering the receiver’s cost basis in the asset; and 3) The proceeds are less than the giver’s basis and more than FMV at the time of gift, which allows the recipient to avoid tax implications on the gift.
Cost Basis Example 1: Proceeds are Greater than Giver’s Cost Basis
- The FMV at the time of the gift was $2,000.
- The giver's cost basis was $2,500.
- Dylan sells the .5 BTC for $5,500.
Since Dylan is in a gain position at the time of disposing the .5 BTC he received, Dylan will adopt the giver’s cost basis and he will recognize long-term capital gains of $3,000. The FMV at the time of the transaction is inconsequential because the giver’s cost basis is lower than the sale proceeds.
Cost Basis Example 2: Proceeds are Less than Giver’s Basis and Less than FMV at Time of Gift
- The FMV at the time of the gift was $2,000.
- The giver’s cost basis was $2,500.
- Dylan sells the .5 BTC for $1,500.
Same facts as above, except now Dylan sells the BTC for $1,500. Because Dylan is in a loss position, his basis is limited to the lessor between the gift giver’s cost basis or the FMV at the time of the gift. In this circumstance Dylan must take the $2,000 FMV as his basis and accordingly recognize a long-term capital loss of $500.
Cost Basis Example 3: Proceeds are Less than Giver’s Basis and More than FMV at Time of Gift
- The FMV at the time of the gift was $2,000.
- The giver’s cost basis was $2,500.
- Dylan sells the .5 BTC for $2,400.
Same facts, except Dylan sells the BTC for $2,400. In this circumstance Dylan can’t use the giver’s cost basis or the FMV because using the giver’s basis would result in a loss and using the FMV would result in a gain.
In the IRS Publication 551: Basis of Assets, it states:
“If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property.”
Good Karma:
There is no better karma than to give to those in need. Whether you are giving to a friend or to a charitable organization, you can take advantage of tax savings. For the reasons outlined above, giving cryptocurrency is typically far more beneficial than making a cash donation due to the tax advantaged savings. It is typically most beneficial to donate long-term appreciated capital assets, but there are also large tax benefits to gifting any appreciated assets.
Organizations like The Giving Block enable charitable donations using cryptocurrency, which can create tax savings for crypto investors. TaxBit is working with The Giving Block to further optimize cryptocurrency charitable contributions so that taxpayers can give more and reduce their tax burden. Donate with the Giving Block today to help those in need and use TaxBit to optimize your charitable tax savings.
