Cryptocurrency investors are ending the year with some eye-popping gains, and some may be wondering how to minimize their upcoming tax bill — but many are unaware of one such option that could also help make the world a better place.
More than half (55%) of crypto investors said they weren’t sure whether they could donate crypto assets to charity, according to a survey conducted this past summer by Fidelity Charitable, a provider of donor-advised funds, a popular charitable giving tool. Of those crypto investors who had donated digital currencies, 44% said the process was challenging.
Those are disappointing stats to people like Anne Connelly, a blockchain investor and author of “Bitcoin and the Future of Fundraising: A Beginner’s Guide to Cryptocurrency Donations.” She says crypto represents “a revolution on many levels” for philanthropy and nonprofits because it makes transferring funds faster, more secure and cheaper.
It’s especially useful for humanitarian aid organizations working in places without viable banking systems, or in countries where it’s difficult for certain groups, like women, to access resources. For example, the United Nations World Food Program uses blockchain technology to make it easier for people living in refugee camps to receive money for food.
One of Connelly’s favorite examples of a charity using crypto is Code to Inspire, a computer coding school for girls and women in Afghanistan that accepts cryptocurrency donations and uses it to pay students for coding work.
“It makes the process much cheaper and enables microtransactions in a way that isn’t necessarily possible using credit cards, and it just gives people the freedom to donate their money where they want to right on the ground,” Connelly said.
The rise of cryptocurrencies also means there’s a new crop of potential donors sitting on wealth that could benefit charities, Connelly noted.
“There’s generational levels of wealth that have come from this in literally a single decade. If someone had invested about $55 in Ether at the ICO [initial coin offering], they’d be a millionaire today,” she said. “It’s a massive community of people that are ready to give, but they’re not being asked.”
One recent example shows both the promise and the challenge of crypto philanthropy: The co-founder of Ethereum
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Vitalik Buterin, donated $1 billion worth of Shiba Inu coin
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to COVID-19 relief in India in May, a couple of weeks after becoming the world’s youngest known crypto billionaire at age 27.
The value of the coin plummeted after the announcement, and two months later, the founder of the aid group that received the donation said “only $20 million had been used due to complexities with both converting the cryptocurrency and complying with government regulations in India regarding the assets,” the Associated Press reported.
“Well-known nonprofits such as the Salvation Army, Toys for Tots and Save the Children now accept crypto donations.”
Donating crypto appears to be growing in popularity. Crypto Giving Tuesday — a fundraising campaign that ran alongside the international fundraising campaign Giving Tuesday on Nov. 30 — raised $2.4 million in donations for 1,007 nonprofits this year, up from 120 nonprofits in 2020, organizers said. The traditional Giving Tuesday raised an estimated $2.7 billion this year.
If you’re a crypto investor looking to donate some of your holdings, here are five questions to ask first:
Which charities accept cryptocurrency donations?
Some studies have suggested that less than 4% of charities accept crypto donations, Connelly said, but the number is growing quickly. Well-known nonprofits such as the Salvation Army, Toys for Tots and Save the Children now accept it. Fidelity Charitable, the largest provider of donor-advised funds in the U.S., started accepting bitcoin in 2015. This year it had received $158 million in cryptocurrency assets as of the end of September, a 464% increase from the same period in 2020.
One quick way to find nonprofits that accept crypto is through platforms such as The Giving Block and Every.org, which specialize in connecting crypto donors with charities and streamlining the donation process.
A word of caution: Some charities may need to outsource the handling of cryptocurrency and may charge the donor a fee because of that, so donors should ask about this before proceeding, said Tony Oommen, a vice president and charitable planning consultant at Fidelity Charitable.
What kind of tax break can I get for donating crypto?
Donating cryptocurrency can potentially give donors a double tax benefit: They can avoid paying capital gains taxes and reduce their taxable income, because they can deduct the full market value of the crypto.
But make sure you pick the right assets, Oommen told MarketWatch. “It makes sense to cherry-pick the assets with the most unrealized gain to donate in order to maximize the benefit of a tax deduction as well as a tax exclusion,” he said.
He added, “The great thing about an exclusion is that because it is income that never hits the taxpayer’s personal 1040 return, it is not subject to any adjusted gross income limitations and can be a benefit regardless of whether the donor itemizes their deductions or not.”
Will I have to get my crypto donation appraised?
The Internal Revenue Service classifies cryptocurrency as property, not as a publicly traded security. That means that for donations of cryptocurrency over $5,000 in value, “tax rules stipulate that the donor will need to obtain an independent, third-party qualified appraisal of the value of the donated cryptocurrency to substantiate the tax deduction that they will claim on their tax return for the tax year of the donation,” Oommen told MarketWatch.
Donors should factor in the cost of the appraisal when they’re deciding whether to donate crypto vs. another type of asset, Oommen said. For example, donors don’t need to get appraisals for donations of marketable securities to claim a tax deduction.
One example of how to calculate it: Say a donor was deciding whether to donate a particular publicly traded stock vs. bitcoin
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There is no cost to donate the stock, but let’s say the appraisal for the bitcoin cost $600. “So, the relative amount of the capital gains tax savings for donating the bitcoin would need to be higher than the $600 valuation cost to justify giving the bitcoin vs. the stock,” Oommen said.
“‘For people in cryptocurrency, obviously they really believe in its ability to create change.’”
When is the best time to donate cryptocurrency?
Don’t make the mistake of donating cryptocurrency that you’ve owned less than 12 months, Oommen said.
“While this is not specific to cryptocurrency, many crypto investors have had significant short-term gains and might think about donating crypto held less than a year,” Oommen said. “The problem with that is that the asset needs to have been held long-term in order for the donor to be able to claim a charitable tax deduction for the full fair market value. Donations of appreciated short-term assets are limited to a deduction value ‘at cost basis’” — in other words, the original value of the asset, before its value may have increased.
There’s also a timing question to consider related to the volatility of cryptocurrencies. Although cryptocurrency trades 24/7, the nonprofit receiving the donation may only sell the cryptocurrency on a work day during business hours.
“If someone donates cryptocurrency by pushing coins to the charity’s online wallet late on a Friday, it may only be sold the following Monday and the price could have dropped dramatically during the weekend, potentially leaving far less for the charity’s mission than the donor had expected,” Ooomen said.
What will the nonprofit do with the donated crypto?
Most nonprofits typically sell cryptocurrency as soon as they receive it. But some crypto evangelists would feel better about their donation if they knew the organization was going to hold on to the crypto either as an investment or because it could be a useful tool for helping the charity deliver its services, for example, for projects overseas. If this is a concern for the donor, they should ask the charity before making their donation.
“For people in cryptocurrency, obviously they really believe in its ability to create change,” Connelly said. Donors who would prefer nonprofits hold onto their crypto donation should find out first whether the charity “is really on board with cryptocurrency and the change it can bring vs. just seeing it as another asset they can accept to do their work,” she added.
