The cryptocurrency ecosystem has expanded significantly in recent years. While institutions like the IMF are beginning to embrace their innovation, they are also calling on investors to exercise caution.
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Cryptocurrency donations to charity are exploding, with gifts continuing to arrive as the calendar fades.
Digital asset donations in 2021 increased 583% from 2020 on Crypto Giving Tuesday, a campaign started by The Giving Block, a crypto fundraising and donation platform for nonprofits and individuals.
On Tuesday 2021, the Washington, DC-based company processed $2.4 million in gifts, with an average donation of $12,600, by company, and giving has continued into the holiday season.
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Pat Duffy, co-founder of The Giving Block, said: “That day inspired hundreds of conversations with high net worth donors, companies and projects looking to give as gifts.
And other companies have seen similar growth in crypto philanthropy.
“We’ve seen a high level of adoption,” said Tony Oommen, vice president and philanthropic planning consultant at Fidelity Charity, a 501(c)3 organization that accepts digital currency through sponsors. spike with an increase of nearly 5 times from 2020 to 2021. fund, a charitable investment account for future gifts.
Part of that could be due to some of the assets’ unprecedented growth over the past year, he said. For example, the bitcoin price has increased by almost 70% since the beginning of 2021.
However, some data suggests that cryptocurrency holders may be more generous than other investors.
Around 45% of Crypto Owners Donated $1,000 or More to Charity in 2020, According to One Fidelity Charity Research, compared with 33% of all investors.
“I think that people who are often young and live the ideal are first provided with transformative capital,” says Duffy, explaining how it can spark a desire to reciprocate.
While tax not the main motivation for gifts, there is still time to record 2021, experts say. Here’s what to know before donating year-end crypto to charity.
Tax handling
Cryptocurrencies are assets in the eyes of the IRS, which means it may be subject to capital gains tax if sold or traded for a profit, and length of ownership can affect rates.
If you hold the digital currency for more than a year, it may qualify for long-term capital gains of 0%, 15%, or 20%, depending on taxable income.
However, assets owned for less than 12 months may arise ordinary income tax, up to 37% for the top earners.
Taxes apply to the difference between the purchase price, known as the base, and the value of the property when it is sold, exchanged, or used for purchase.
However, someone can bypass the tax on profits by donating the cryptocurrency to charity, and those minimizing the deductions may be eligible for debt forgiveness.
“Make sure you’ve got hold of [crypto] over a year if you want a deduction based on fair market value,” says certified financial planner Leon LaBrecque, chief growth officer at Sequoia Financial Group in Troy, Michigan, who also works with Ronald McDonald House in Southeast Michigan, said .
Make sure you’ve got hold of [crypto] for more than one year if you want a deduction based on fair market value.
Leon LaBrecque
Head of Growth at Sequoia Financial Group
Donors can deduct the fair market value of a yielding asset, up to 30% of their adjusted gross income, if they have held it for longer than 12 months, he said.
Of course, someone with a higher adjusted gross income can get a larger tax break, said Ryan Losi, CPA in Richmond, Virginia and executive vice president of accounting firm PIASCIK.
If gifts exceed 30% of adjusted gross income, they can carry over the excess deduction for up to 5 years, he said.
For example, let’s say someone’s adjusted gross income is $100,000 in 2021. If they donated $50,000 in bitcoin by December 31, they could deduct up to $30,000 this year and have can write off the remaining $20,000 over the next 5 years.
However, even smaller crypto gifts could offer tax benefits in the future.
Matt Metaras, a registered agent and crypto tax specialist at MDM Financial Services in Rochester, New York, said that if someone plans to give away $1,000 in cash, they can donate that money in cash. electronically and use cash to redeem their positions.
“You’ve effectively strengthened your base,” he said, increasing your purchase price to its new value and reducing future taxes if the property continues to grow.
“It’s just a matter of how it contributes to the big picture of your crypto holdings,” he said.
Eligibility appraisal
While the tax treatment for the awarding of cryptocurrencies or other assets is “almost identical,” according to Metaras, there is one important difference.
“If you are donating more than $5,000, it is important to keep in mind that you must be qualified, and prices can range from $100 to $600,” he said.
If you’re donating more than $5,000, it’s important to note that you must be eligible.
Matt Metros
Cryptocurrency Tax Specialist at MDM . Financial Services
Oommen said the cost of the appraisal can affect the decision to choose the right property. “It’s almost like a math problem.”
For example, let’s say someone has a digital asset with a growth of $2,000 and an appraisal cost of $500. If they only expect a $200 write-off, the donation may not provide a net financial benefit, he said.
However, due diligence may occur after gift giving. Donors have tax filing deadlines but they have to Model 8283 for non-cash charitable gifts accompanied by tax returns to claim deductions.
Vulnerabilities for selling and laundering cryptocurrencies
While cryptocurrencies with built-in returns may be tempting to donate, a losing position changes strategy, experts say.
Losi said: “If the cryptocurrency drops in price, it might be better to donate other profitable assets held for more than a year.
Someone could sell the digital currency at a loss to cover other gains, buy back the asset itself to maintain visibility, and donate another prized investment.
“That’s really the kind of play I did when I learned that the cryptocurrency has dropped in price over the last 30 days,” Losi added.
Currently, digital assets do not follow the so-called wash sales rules, a measure that prevents someone from selling a lost asset and buying back similar investments within 30 days before or after the sale.
Although House Democrats have aimed for Close the loophole for selling and laundering cryptocurrency as of December 31, Senator Joe Manchin, DW.Va., said he won’t vote for Build Back Better, which pauses the current instance of the spending plan.
Cryptocurrency donation tips
Some digital currencies have a security feature called “whitelisting,” which only allows withdrawals to specified addresses, Duffy explained, and adding these permissions can take days.
“If you want your crypto donation to reduce your tax liability for 2021, you should whitelist the addresses now,” he suggested.
And while a growing number of nonprofits accept cryptocurrency, if a preferred charity doesn’t, donors can use a third-party platform to make a gift.
“A donor-advised fund can be used in the UI to process the gift and convert it into cash so the charity can use it for their mission,” Oommen said.
Furthermore, someone giving a larger gift can use the platform for personalized services, such as guidance on approved nonprofit organizations, tax guidance, and reviews.
