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Ah, December. It always feels like this month sneaks up on us. For many, it is the last chance to impact their tax planning. But in the year end rush, there is a lot to consider.
The past 18 months have been a wild ride in the capital markets. From the lows of March 2020 to the highs of the recent months, investors have done incredibly well. Further investors who fearlessly entered the crypto market a few years back might find themselves with significant gains.
And that is where taxes can become tricky.
“Think of cryptocurrency like a stock. Sell it in less than a year at a gain, and it is ordinary income. More than a year, and it’s taxed at long-term capital gains rates,” explains Adam Markowitz, EA and Vice President, Howard L Markowitz PA, CPA
While recognizing a gain might seem like the only option available to crypto investors, a unique tax planning opportunity is available: the ability to use your cypto holdings to donate to charity. As crypto becomes commonplace in investment portfolios, more donor advised funds (DAFs) and charities are accepting these holdings in their donations.
For many this will be a significant planning opportunity, but just because it is permissible, doesn’t mean it’s straightforward. There are a few rules of the road that crypto investors must consider when donating to charity.
Tax Mechanics
Before we get into how crypto can be donated, it is important to understand the mechanics of donating noncash assets charities.
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“In addition to cash donations, individuals, partnerships and corporations are allowed a charitable deduction on their tax returns for donated property,” explains Lorilyn Wilson, CPA & CEO of Lookahead LLC and DueNorth PDX.
Publicly traded securities are commonly-donated non-cash items. In this situation, investors can get a special two-part tax benefit. First, they do not have to recognize the capital gain; second, they get a charitable deduction when the holdings go to the charity or donor advised fund.
“But there are rules. For property donated with a combined worth of more than $500 (think Goodwill donations, cars, etc.), an additional form called Form 8283 must be filed as well,” says Wilson.
For publicly traded holdings, only Part I of the form is required.
“The IRS requires you take the charitable deduction at the fair market value of the property being donated – and this is the form used to do just that,” says Wilson. “Questions such as the name of the organization donated to, property description, date property was acquired and contributed, how much it cost, and what the resale value is – is all information gathered on this form.”
Donating stocks can be a powerful tax management tool, but charities and DAFs have historically been nervous about crypto. Things are changing and the door for donating crypto is now open.
Be Aware of Appraisal Rules
Donating crypto is not as straightforward as donating publicly traded stocks. The world of crypto has not been transparent and the rules around donations reflect that.
“Now let’s say someone has decided to donate their crypto or other non-publicly traded securities. Could they artificially inflate the value of their donated property to get a higher deduction and pay less in taxes? As usual, the IRS is one step ahead of them,” says Wilson.
That’s why it is important to be aware of another set of rules surrounding Form 8283. Unlike publicly traded securities, a donation of cyrpto currency that exceeds $5,000 will require a qualified appraisal. Neither the IRS nor the SEC has taken any official position to treat cryptocurrencies as securities. The IRS has designated cryptocurrency as property and not currency.
A qualified appraisal must meet IRS requirements, including the need to use a qualified appraiser who has met education and experience requirements. Qualified appraisers are usually licensed or certified in the state in which the property is located.
Further, the appraisal must be done no more than 60 days prior to the donation and no later than the due date of the tax return including extensions. The appraisal is reported on Form 8283 and the appraiser is required to sign the form. No appraiser? No deduction.
It can be challenging to find a crypto appraiser, but as the technique is in greater demand, there are more resources available. Investors who use a donor advised fund like Schwab Charitable or Fidelity Charitable, may also be able to draw on their expertise.
Investors should anticipate that they will spend approximately $500 to $1,000 on appraisal fees, but the tax benefit may be worth it.
Check With Your Tax Professional
Ultimately, crypto investors should seek help from their tax professional to make sure that they take the appropriate steps in donating crypto to a DAF. It could mean the difference between a great tax planning experience and the disappointment of a disallowed deduction.
