The world of cryptocurrency is new, innovative, and ever-changing. Depending on the cryptocurrency, there’s a good chance you’ll get a nice return on your investment if you jump in from the beginning, but you’ll also have to pay a hefty tax bill.
If you’re looking to avoid the IRS getting your hands on all the money you make in your cryptocurrency investments, perhaps you should consider another avenue this tax season: donating it to worthy causes.
Here’s why donating cryptocurrency could be the smartest move you make this year.
Tax-free charitable donations
Adam Nash, CEO and co-founder of Daffy, a modern donor-advised fund platform, emphasizes that the charitable contribution deduction is one of the most generous deductions in terms of the tax code, and taxpayers can deduct up to 30% of their adjusted gross income for asset donations in any given year.
According to Fidelity, some of the assets that can be donated include stocks, bonds, mutual fund shares, and cryptocurrencies.
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Donate cryptocurrencies
If you’re lucky enough to hold a cryptocurrency that has appreciated in value for more than a year, you can donate it without having to worry about paying capital gains taxes, Nash says.
“You’re getting one of the most generous deductions in the tax code. When you donate cryptocurrency that you’ve held for more than a year to a qualifying public charity, the IRS treats the value of the donation as the fair market value of the asset at that time,” he said. “Not the price you paid for it — it’s the current fair market value.”
Ephraim Olson, co-founder of CPAI, an AI-driven crypto tax reconciliation, preparation, and reporting platform, also noted that donating appreciated assets from crypto investments to charity is an excellent way to maximize savings, as long as certain conditions are met.
“As long as all the rules are followed, the taxpayer making the donation can deduct the fair market value of the property as a donation, even if they paid much less for the property,” Olson explained. “In other words, the taxpayer can receive the benefit of the appreciated donation without first having to recognize taxes on the appreciated portion.”
Ultimately, donating crypto and itemizing your tax credits can save money. “If you itemize your tax credits, this means donating appreciated crypto can save taxpayers money and bring more money to the charity,” Nash said.
Know the rules and consult a professional
Olson explained that in the cryptocurrency space, there are specific valuations and other requirements that must be met for tax purposes. However, if these criteria are met, taxpayers could potentially receive the value of the bull run without first recognizing taxes on the growth.
“Right now, the growth of certain crypto assets may not be significant, but if the market moves in the remainder of the year, donating cryptocurrencies could present an excellent savings opportunity,” Olson said, adding that there are limits to how much income can be offset by donating appreciated assets, and that strict rules must be followed to obtain a proper valuation.
“Many of these requirements cannot be addressed later, so if missed, the donation will not be deductible,” Olson said. “Be sure to hire a professional to ensure all regulations are followed.”
