2021 has seen an incredible rise in prices for crypto assets like Bitcoin and Ethereum. Bitcoin rang in the New Year at a price of $28,994 and now trades around $61,475, for an eye-popping return of 112%. Ethereum opened the year at $737, and now trades at $4,370, for an even larger return of 493%. By any measure, these gains are incredible.
While millions of people have benefited from the stupendous rise in crypto value, millions more have not. As 2021 winds to a close, many people are looking around and asking, "What can I do to help those less fortunate than myself?"
As it turns out, 2021 is also an amazing year to be generous with crypto. Donating crypto can not only be a generous act, but it can also be a tremendous tax advantage for those with appreciated crypto.
Understanding Taxes on Crypto
Taxes on crypto are similar in some ways to taxes on other investments.
As per IRS Notice 2014-21, Bitcoin & Ethereum are considered property for the purpose of taxes, and the tax rates are considered the same as for other investments like stock. As a result, taxes on crypto transactions are based both on the length of time you held the asset and the gain (or loss) that you had on the investment during that time period.
Assessing the length of time is fairly simple: if you hold your crypto for less than 365 days, any gain on that investment is considered "short term," and taxed at federal ordinary income tax rates. If you hold your crypto for more than a year, then your investment gains qualify as "long term," which in general offers lower tax rates.
It's not surprising that many crypto investors have some level of dread and anxiety about potential tax issues with the crypto they hold. Fortunately, there is a reliable way to avoid those issues: charitable donations.
When it comes to donating assets, the IRS has very different rules for assets that have been held short-term vs. long-term. If you have held an investment for less than a year, then the IRS limits your deduction to the fair market value of the asset *minus the capital gain.* As a result, your deduction is effectively limited to your purchase price.
In this case, it usually makes sense to just sell the asset and donate the after-tax proceeds rather than donating the asset itself. This is even more true for assets where you have a loss since donating the asset prevents you from taking the capital gains loss on your taxes.
However, when you have an investment with long-term gains, the benefits of donation are significant. When you donate an investment that you have held more than a year to a qualified public charity, the IRS considers the donation value to be the fair market value of the asset at the time. Not the value you paid for it — the current fair market value.
If you itemize your tax deductions, this amount can be substantial. Donations of crypto assets held less than one year (short term) can currently apply towards a maximum of 50% of your adjusted gross income (AGI), with a five-year carryover. For crypto assets held more than one year, the deduction is capped at 30% of your AGI.
Let's look at a plausible recent example, and then ask (ala Marvel) "What If?"
Imagine a couple that makes $250,000 who purchased Bitcoin in Feb 2020 for $10,000, and then decided to sell it in May 2021 for $60,000.
In a state like California, a couple earning $250,000 might be in a 15% federal tax bracket for long-term capital gains in addition to a 9.3% California tax bracket, for a total of 24.3%. Since that couple purchased (1) Bitcoin at $10,000 and then sold it for $60,000 after holding it for less than one year, they would owe a total of $12,150 in taxes on a reported gain of $50,000, leaving them with an after-tax gain of $37,850.
Of course, they could lighten this tax bill by donating the proceeds of the sale to charity. Assuming the couple is in the 24% federal tax bracket for income, added to their 9.3% tax rate, their total income tax rate would be 33.3%. With a cash donation of $47,850, they would get a tax reduction of $15,934. By making this generous donation, their net tax impact would be negative $3,784 (15,934 - 12,150). Not a bad reward for being so generous!
However, if this couple donated their Bitcoin directly, the numbers are quite different.
Donating 1 Bitcoin to charity, with a fair market value of $60,000, would allow the couple to deduct $60,000 off of their income. At a combined income-tax rate of 33.3%, that would potentially save them $19,980 in taxes. Since they would have owed $12,150 if they sold the Bitcoin, the total savings to the couple is $32,130.
Even if they donated the proceeds of the sale, they still would have saved $16,196 in taxes!
The generous couple wins twice because they (1) get a tax deduction for the larger donation, and (2) they never have to pay capital gains taxes on the appreciation of the Bitcoin.
But here is the amazing part: the charity wins too! In the first scenario, if the couple donated the proceeds to charity, they would have only been able to donate the proceeds of the sale: $47,850. However, in the second scenario, the couple donated a Bitcoin worth $60,000. Since the not-for-profit organization does not have to pay taxes, they get the full benefit of that $12,150, a 25.4% larger gift.
Give Crypto with Daffy
Daffy has a very simple mission to help people be more generous, more often. As a result, we've tried to make it as easy as possible to donate crypto:
- In the Daffy app, just select "Add Funds"
- Select "Crypto" and choose which coin to donate. Daffy currently supports Bitcoin & Ethereum.
- Get your custom wallet code, and move crypto to it.
- Daffy will liquidate your contribution and invest it in the portfolio of your choice.
Because Daffy Charitable Fund is a 501(c)(3) not-for-profit organization, your crypto donation qualifies as a tax-deductible donation in the immediate tax year it is made.
Better yet, if you pick one of Daffy's unique pure crypto portfolios, you can ensure that your contribution is invested back into crypto so that you continue to participate in the ups (and downs) of the crypto market. Daffy has partnered with Coinbase to ensure that our crypto portfolios are held with a secure and trusted custodian.
The best part about using Daffy to donate crypto is that you no longer have to worry about whether or not your favorite charity supports crypto donations. Daffy delivers all donations to charities in cash, so you can choose from any of the over 1.5 million charities that Daffy supports.
If you are one of the fortunate investors who have benefitted from the amazing rise in crypto, we hope you'll consider giving a little this year to charities in need.
This is a rare opportunity for you to benefit personally and maximize your generosity to charities.
Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative, and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.