The Ins and Outs of Cryptocurrency Donations

If you have a cryptocurrency portfolio that's experienced gains, you may be thinking of giving some of those profits to charity. Here are some considerations that can impact your gift.

If you sell cryptocurrency for a gain, you'll have to pay taxes—either at capital gains tax rates for crypto held for more than a year, or at ordinary income tax rates for crypto held a year or less. The 3.8% net investment income tax could also apply if your income is above certain limits.

By donating your cryptocurrency, on the other hand, you may be able to eliminate capital gains and potentially take a tax deduction in the year of the donation, assuming you itemize and depending on how you obtained the crypto.

• If you purchased the crypto and have held it for more than a year, you may be able to deduct the full fair market value (as determined by a qualified appraisal) up to 30% of your adjusted gross income (AGI)—and carry forward any remaining balance for up to five tax years. If you've held it less than a year, your deduction will be limited to the lower of your cost basis or the crypto's current fair market value, up to 50% of your AGI.
• If you mined the crypto, "the IRS has yet to provide guidance on such gifts," says Caleb Lund, director of the Charitable Strategies Group at DAFgiving360™, but there are two likely scenarios. If the crypto is considered business inventory, the deduction may be limited to its cost basis. If the crypto is considered property, the deduction may be determined by the holding period, as it would be if you had purchased it.
• If you received the crypto as compensation, your donation deduction will likely be determined by the holding period.

Donations over $5,000 will need to be valued by a qualified appraiser. You'll also need to file IRS Form 8283 with your tax return and, if the donation is large enough, include a copy of the appraisal.

"We suggest working with a tax professional to ensure you get the full tax deduction you deserve while not running afoul of the rules," Caleb says.

When evaluating assets to donate, it's generally best to prioritize highly appreciated holdings with the lowest possible cost basis—the greater the difference, the more capital gains tax you'll potentially avoid.

If you haven't settled on a charity, you might consider a donor-advised fund account, which allows you to make an irrevocable gift—and potentially take the full tax deduction in the year of the contribution. The donor-advised fund legally controls the assets once donated, but you may recommend grants to qualified nonprofits at any time—and the assets can be invested for potential growth, thereby increasing your giving power.

"Most donor-advised funds, including DAFgiving360, work with a third-party provider to accept your crypto donation and liquidate it to cash," Caleb says. "We make the process as straightforward as we can, but be sure to factor in a few weeks if you're trying to make a donation by year-end."