Donate Your Crypto Profits to Charity (and Avoid Tax Stress)

Donate Your Crypto Profits to Charity (and Avoid Tax Stress)

By Mark Nestmann • May 8, 2018

Do you have profits in bitcoin or other cryptocurrencies you need to report to the IRS? Are you – and your tax advisors – confused about how to do it?

Join the crowd. Taxpayers who hold crypto investments, especially those who used cryptos to buy and sell products and services, are struggling to determine their tax obligations. Meanwhile, the IRS is salivating at the prospect of a tax windfall and believes that most crypto investors aren’t paying tax on their profits.

Unfortunately, it’s not easy to figure out what you owe. And most accountants are completely unfamiliar with calculating crypto gains and losses.

Here are the basic rules.

In 2014, the IRS announced that bitcoin and other “virtual currencies” would be treated as property for federal tax purposes.

This means that the concepts of capital gains and capital loss apply. For instance, if the value of the bitcoin you hold increases, the gain in value must be computed and reported when you sell it or otherwise dispose of it.

Capital gains tax will be due on the gains. This would be assessed at a top rate of 20%, plus the 3.8% Obamacare surtax if your income is high enough, plus any state tax.

If you’ve held the bitcoin for less than 12 months, gains are taxed as ordinary income, which could be as high as 43.4%, plus state tax.

These rules only apply to gains or losses you make with cryptocurrency investments. If you get paid in bitcoin or some other crypto, that income is treated as any other income and is subject to a higher tax rate.

Likewise, if you mine a cryptocurrency, your earnings are counted as gross income at the dollar value of the crypto on the day you received it. And if you’re a self-employed miner, those earnings are subject to Social Security and Medicare taxes.

If you have kept good records of all your crypto purchases, mining costs, and so on, you can probably calculate a basis cost and make a sensible calculation of capital gains, just like any other security or commodity transaction.

But if you don’t keep good records and aren’t sure what the tokens cost on any given day, you will have a problem figuring out what basis to use. Especially for miners, the cost calculations are complex, and even the date on which you "mined" a coin is unclear if you were part of a pool (which virtually all miners are).

If you have an account at Coinbase, the largest crypto exchange, your job is a bit easier. Coinbase gives you a “cost basis for taxes” report that summarizes your digital currency purchase and sales, showing your cost basis and capital gain or loss. You can give this to your accountant, and they should be able to calculate your tax liability.

If you use a bitcoin wallet, you can convert the value of bitcoins to dollars at the time of each transaction, but that obviously could get tedious. The easiest way to do this would be to record each transaction when you make it, along with the current value of bitcoin, and give the records to your accountant at the end of the year.

If you’re one of the hundreds of thousands of confused crypto investors trying to figure out your taxes, one way out is to simply give it away. Many people seem to be taking this approach. More than $22 million worth of bitcoin was donated in 2017.

A number of high-profile charities, including Greenpeace, Wikipedia, and the Red Cross accept bitcoin donations on their websites. You can also donate via BitGive, the world’s first bitcoin non-profit. BitGive partners with Save the Children and the Water Project, among others, to distribute bitcoin donations.

Most of us know that a cash donation to your favorite charity is tax deductible, dollar for dollar. But by donating appreciating assets like stocks or cryptos you get an even more attractive benefit: you avoid a capital gains bill. That’s one reason huge charitable organizations like the Gates Foundation and the Rockefeller Foundation hold a lot of donated stock.

The Gates Foundation – the world’s largest charitable foundation – holds more than $40.3 billion in assets. Yet, just 1% was held in cash. The rest was stocks or appreciating assets.

Let’s walk through a transaction Warren Buffett made with the Gates Foundation to see how it works. In 2015, Buffett pledged $2.15 billion in Class B Berkshire Hathaway shares to the foundation. For his generosity, Buffet got a $2.15 billion tax deduction for offloading his shares.

Had he sold the shares instead, he would have faced capital gains tax on the appreciation. By donating his wealth, he enjoyed a charitable deduction and avoided capital gains tax.

There’s another benefit here too. Buffet shaved $2.15 billion off his taxable estate. As he comes to the end of his life, Buffet is wise to offload his wealth to lower the death tax burden his beneficiaries will face.

But of course, when it comes to the IRS, there are many rules to keep in mind.

  1. The donation must be made to a qualified organization. Before donating anything to a charity, ensure that the organization is “qualified” by the IRS.

  2. Donations of appreciated assets are capped at 30% of your adjusted gross income (AGI). If your AGI was $100,000 in 2017, you can donate only $30,000 worth of cryptos. For donations to some private foundations, fraternal societies, cemeteries and veterans’ foundations, the cap is 20%.

  3. Assets held for more than one year have the most favorable tax treatment. Short-term capital gains follow a different set of rules. In that situation, you may only claim the price you paid for the asset, eliminating the potential to write off any gains.

  4. Charitable deductions must be itemized. If you claim a charitable deduction, you must use the itemized deduction when filing your tax return. You can’t claim a charitable donation using the standard deduction.

  5. Donations to foreign organizations are not deductible. Donations must be made to US institutions. You can donate to a US organization that operates abroad, or you can transfer the money to a private foundation or donor advised fund that makes foreign donations. In all cases, the receiving organization needs to qualify as a US charity.

  6. You must provide evidence of your donation. Keep a record of all cash donations and ask for a receipt from the organization. If you donate more than $250, you’ll need written acknowledgment. As for property and assets, you’ll need to file Form 8283 to report donations valued above $500. This is the Noncash Charitable Contributions form, and you’ll attach it to your tax return. If you donate more than $5,000, you’ll need to supply a full appraisal of the assets in Section B of Form 8283.

Donating your crypto profits to a good cause has one additional benefit. It counters the widespread belief that crypto investors are criminals or terrorists. And dispelling that myth is something we can all celebrate.

Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.

Feel free to get in touch at service@nestmann.com or call +1 (602) 688-7552 to learn how we can help you.

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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