By Eric Rosenberg, WCI Contributor
Cryptocurrency and other blockchain assets offer unique opportunities for charitable donations. Like cash, you can send cryptocurrency to a charitable organization, offering valuable assets to a favorite cause with the potential for a tax deduction. But like donations of stocks, you may be able to donate while avoiding the additional taxes of an investment gain.
Here’s a closer look at the implications of donating cryptocurrency and if it makes sense for you and your chosen charity.
Pros and Cons of Cryptocurrency Donations
Here’s a quick review of the pros and cons of donating cryptocurrency:
Pros
- No capital gains taxes on donated currency
- Potential tax savings for donations
- Offload digital assets to a good cause
Cons
- Not all nonprofits accept cryptocurrency donations
- Blockchain fees for transferring and selling crypto
- No further cryptocurrency gains for donated assets
Advantages of Donating with Cryptocurrency
Donating cryptocurrency is helpful to both the donor and the charity in several ways. The donation’s value is of utmost importance and is ideally used to further the organization's mission.
A website like Charity Navigator or Charity Watch can help you understand how the organization uses resources, executive compensation, and other details. After all, when making any donation, it’s important to know that the money is going to the cause rather than mostly to overhead expenses or paying staff.
Next, consider the tax benefits for your household. You could be eligible for a significant tax break depending on your income and how much you donate. High-income households who make large monetary donations, including crypto, can potentially deduct up to 50% of their adjusted gross income.
If you were an early crypto investor and saw significant gains, donating can also lower your capital gains taxes. If you donate crypto (or stock) to a charity, the investment gains are not subject to the capital gains taxes you would have otherwise been required to pay. If you made thousands of dollars from crypto, you may be happier giving the gains to the charity tax-free than keeping the profits minus the taxes.
More information here:
A Neurologist’s Road to Becoming a Bitcoin Maximalist: Why Bitcoin Is Not the Next AOL
Disadvantages of Donating with Cryptocurrency
The biggest downside of donating cryptocurrency is the potential fees and logistics. While many crypto users are comfortable buying and selling using a favorite wallet and exchange, some nonprofits are far from tech-savvy. Many wouldn’t know how to accept cryptocurrency donations, let alone liquidate and turn the crypto into US dollars.
Depending on the currency, your donation amount, and the timing, fees can also be a factor worth considering. Blockchain fees are required whenever someone sends digital currency to another wallet. The crypto donation would be subject to a double whammy of blockchain network fees—once for the donation to the charity’s wallet and again when the charity sells for fiat—or government-backed currency.
Crypto network fees vary widely by currency and network volume. If you enter a transfer at a busy time, a proof-of-work currency like Bitcoin could be subject to significant fees. However, proof-of-stake currencies and those with lower fees, like Dogecoin and Stellar Lumens, may only cost a few cents to send.
There’s also a component of the transaction where the currency is sold. Cryptocurrency exchange fees vary widely but often sit around 0.25%-1%, depending on the currency pair. For large donations, the fees to sell can be high. However, you would have to pay those anyway if you were to sell yourself.
Finally, you could miss out on future cryptocurrency gains. While some say the markets are overhyped, others expect the value of cryptocurrencies to grow in value in the future. If you sell before values skyrocket yet again, you could miss out on those market gains.
Can You Use a Donor Advised Fund?
Donations to a Donor Advised Fund (DAF) may also be possible, depending on the fund. A DAF allows you to give cash or appreciated investment assets (stocks or real estate, for example) into a fund that's earmarked for a charity, and you get an immediate tax deduction (no matter when the charity actually takes possession of the asset). The money given can also be invested, and it'll grow tax-free.
A DAF makes it super convenient to give to charities, and certain platforms enable direct cryptocurrency contributions. For example, Fidelity Charitable supports donations in Bitcoin, Ethereum, and Litecoin. Charles Schwab also works with investors to handle non-cash contributions. If you already have a DAF, check with the administrator to learn more about your options for donating cryptocurrency.
How to Donate Crypto: Step-by-Step
If you think donating cryptocurrency is a good fit for you and your chosen charity, these are the general steps to follow:
- Pick the currency to donate: First, you may have to sift through your holdings to zero in on the currency you’d like to donate. Many charitable organizations only accept certain currencies if they take crypto. From Bitcoin to Ethereum and beyond, you must have a currency the charity can accept.
- Find the organization’s wallet address: Next, you’ll need the organization’s cryptocurrency wallet public address for the currency you plan to donate. Remember that Bitcoin can only go to Bitcoin wallets, Dogecoin can only go to Dogecoin wallets, and so on. Some currencies are listed on multiple blockchains, such as USD Coin, so it’s critical that you send them to a compatible wallet. Sending to an address on another blockchain can lead to lost currency you cannot recover.
- Prepare the donation transaction: Setting up the transaction is generally straightforward. After unlocking your wallet, you can follow the prompts to send and enter the receiving wallet address. Double-check everything, as crypto transactions are one-way and can’t be reversed. Even better, triple-check to ensure your details are accurately entered.
- Confirm the transfer was successful: Transactions are bundled into blocks and processed by computers called miners. Each block and transaction has a unique code allowing you to track the transaction until your donation is successfully received in the charitable organization’s cryptocurrency wallet.
- Keep good records for tax purposes: At the time of your transaction, take a snapshot of the price of the currency on public markets and the total value of your transfer. You may need this information for your tax deduction, and it’s important to verify even if the charity sends you a thank you letter. The blockchain entry is a permanent record of the transaction.
That’s it! You can enter the donation in your favorite tax software or hand the details to your trusted accountant to ensure they’re included on your next tax return.
More information here:
What’s the Future of Cryptocurrency? These Fanatics Say It’s Pretty Darn Bright
Bottom Line
Donating cryptocurrency to charities is a great choice for many medical professionals. If you were an early crypto speculator who saw the value of your holdings balloon, donating is an excellent way to lower your tax bills while helping a cause close to your heart. If you understand how it works and are OK with the minor downsides, there’s no reason not to use cryptocurrency as a tool for charitable donations.
Have you donated to charity with cryptocurrency? What was the experience like? Do you recommend it? If not, why not? Comment below!
