This article provides helpful tips for donors wanting to assist nonprofit organizations through cryptocurrency (crypto).
1. Avoid Paying Tax on Unrealized Gains
As crypto like bitcoin, Ethereum, and other digital assets has gained popularity, donating crypto to nonprofits has become more common. Just like other appreciated assets, such as publicly traded stock and private business interests, taxpayers can claim a charitable tax deduction equal to the fair market value of the crypto they donate to a nonprofit if the crypto was held for more than one year.
Donating crypto directly to a nonprofit instead of selling and donating the cash also is a tax-efficient strategy because taxpayers avoid paying capital gains taxes and receive a higher tax deduction at the fair market value compared to the lower after-tax cash amount.
2. Tax Classification of Crypto
Although crypto can be traded on public exchanges, the IRS treats crypto as property according to Notice 2014-21, which creates additional challenges that don’t usually apply to donations of publicly traded securities or currency, e.g., cash.
Being classified as property means that crypto may not rely on the readily valued exception available to publicly traded stock and cash and, therefore, can’t use the value published by crypto exchanges. Instead, taxpayers donating crypto must get a qualified appraisal if the value of the deduction exceeds $5,000 in a tax year. For donations of $5,000 or less, taxpayers can generally rely on the values published by the crypto exchange.
3. Calculating the Deduction
A taxpayer holding crypto that has appreciated in value can deduct the fair market value if the crypto has been held for more than one year. Otherwise, a taxpayer’s deduction from donated crypto is limited to the lesser of their cost basis or fair market value.
The tax deduction is claimed by filing Form 8283, Noncash Charitable Contributions, with your tax return. For donations exceeding $5,000, the taxpayer, qualified appraiser, and nonprofit will need to complete Section B, Parts I, IV, and V, respectively.
A qualified appraisal needs to be conducted by a qualified appraiser in accordance with generally accepted appraisal standards who has earned an appraisal designation from a recognized organization.
4. Required Qualified Appraisal
On January 13, 2023, the IRS released a Chief Counsel Memorandum (CCA 202302012) that confirms the qualified appraisal requirement for charitable contributions of crypto.
The Chief Counsel Advice (CCA) confirmed that if a taxpayer donates crypto for which a charitable contribution deduction of more than $5,000 is claimed, a qualified appraisal is required under Section 170(f)(11)(C) to qualify for a deduction under §170(a).
In addition, the IRS confirmed that if a taxpayer determines the value of donated crypto based on the value reported by a crypto exchange rather than by obtaining a qualified appraisal, the reasonable cause exception provided in §170(f)(11)(A)(ii)(II) will not excuse noncompliance with the qualified appraisal requirement, and the charitable contribution deduction will be disallowed under §170(a).
5. Options for Donations
Please note, that many charities are not able to accept direct donations of crypto. One potential option to consider is donating crypto held for more than one year to a donor-advised fund to claim the tax deduction at the fair market value. The donor-advised fund would then be able to sell the crypto and make a cash donation to the nonprofit.
If you plan to donate crypto to a nonprofit and have questions, please reach out to a tax professional at Forvis Mazars or submit the Contact Us form below.