Cryptocurrency and charitable giving
Because of the popularity of cryptocurrency, some of the world’s largest nonprofit charitable organizations, ranging from the Red Cross to the Rainforest Foundation, have begun accepting cryptocurrency donations.
Like other appreciated assets and business interests, Bitcoin and other type of cryptocurrencies can be donated to charity. Consider donating your bitcoin directly to charity before selling it and donating the after-tax proceeds.
Cryptocurrency investments, such as Bitcoin and Ethereum, held for more than a year may provide a unique opportunity for charitable-minded individuals to strength highly appreciated assets and get the maximum impact with charitable giving.
1.Benefits of Donating Cryptocurrency
1.1 Direct Donation to Avoid Capital Gains Taxes
If taxpayers donate Bitcoin directly to the charity, they can avoid paying capital gains taxes while claiming the whole donation as a charitable deduction.
The difference between the purchase price (the basis) and the selling price is referred to as capital gains. Suppose a taxpayer sells Bitcoin and donates the after-tax proceeds to charity. The capital gains in that case will be subject to short-term or long-term capital gains taxes, depending on how long the taxpayer held the Bitcoin before selling it.
If a taxpayer donates Bitcoin directly to a charity rather than selling it first, they can avoid paying capital gains taxes on the donation, just like appreciated securities donations.
1.2 Your donation goes to the cause rather than payment processing.
You can always donate with a credit or debit card, but there’s a solid case to be made that donating cryptocurrency is a better option on both sides of the transaction. Nonprofits typically charge 3.5% or more in processing fees on credit card donations. If the same donation were made in Bitcoin, the transaction fee would be around $5. The less money an organization spends on fees, the more money it has to support its mission.
1.3 Crypto donations are handled privately.
Donating cryptocurrency is also an excellent way to remain anonymous. According to a recent survey, most Americans of all ages are concerned about their data privacy. Because of its private nature, cryptocurrency is an excellent method for donating to a charitable cause while keeping your identity private and secure. Donating cryptocurrency directly to an organization may improve the security of your personal information and result in more funds going to causes you care about.
2.How To Donate Cryptocurrency
Due to the complexity of setting up a digital wallet, most charities cannot accept direct cryptocurrency donations.
If the donor creates a wallet for the charity but still keeps the keys to the wallet, it may not be considered a donation. Instead, a charity can accept Bitcoin donations via a third-party processor or a donor-advised fund.
2.1 Donate using a payment processor such as BitPay.
Many organizations find it easier to accept donations with the assistance of a cryptocurrency payment processor. A cryptocurrency payment processor, such as BitPay, creates a wallet for the organization and manages the wallet’s transactions. BitPay pays the nonprofit organization in cash equivalent when a cryptocurrency donation is made.
2.2 Donate P2P cryptocurrency to the organization’s wallet.
If you know that your preferred nonprofit takes a “hands-on” approach to crypto donations, which means they have their own crypto wallet, you can send cryptocurrency as you would any other wallet payment.
2.3 Donate cryptocurrency through donor-advised funds.
Legacy financial services providers such as Vanguard and Fidelity offer donor-advised funds to those who prefer a more institutional approach to crypto donations. Donors contribute an amount of cryptocurrency they’ve held for at least a year to these funds, which are registered as 501(c)(3) public charities.
The fund liquidates the donated cryptocurrency and deposits the proceeds as cash into the donor-advised fund. The donor can then suggest how the funds should be invested and eventually given to a charitable organization.
Donating cryptocurrency is not only good for the world; it is also suitable for you. When you donate cryptocurrency, you are supporting causes that are important to you. You may also be eligible for a federal income tax deduction equal to the full fair market value and avoid paying capital gains tax on an appreciated asset.