Cryptocurrency investors end the year with breathtaking gains, and some may be wondering how to minimize their upcoming tax bill, but many are unaware of such an option that could also help make the world a better place.

More than half (55%) of crypto investors said they were unsure whether they could donate crypto assets to charity, according to a survey conducted last summer by Fidelity Charitable, a provider Donor Advised Fund, a popular charitable giving tool. . Among crypto investors who donated digital currencies, 44% said the process was difficult.

These are disappointing statistics for people like Anne Connelly, blockchain investor and author of “Bitcoin and the Future of Fundraising: A Beginner’s Guide to Cryptocurrency Giving.” She says crypto represents “a revolution on many levels” for philanthropy and nonprofits because it makes transferring funds faster, safer, and cheaper.

This is particularly useful for humanitarian aid organizations working in places without a viable banking system, or in countries where it is difficult for certain groups, such as women, to access resources. For example, the United Nations World Food Program is using blockchain technology to make it easier for people living in refugee camps to receive money for food.

One of Connelly’s favorite examples of a charity using crypto is Code to Inspire, a computer coding school for girls and women in Afghanistan that accepts donations of cryptocurrency and uses it to pay for donations. students for coding work.

“It makes the process a lot cheaper and allows for microtransactions in a way that isn’t necessarily possible with credit cards, and it just gives people the freedom to give their money where they want, right in the field.” , said Connelly.

The rise of cryptocurrencies also means that there is a new generation of potential donors sitting on wealth that could benefit charities, noted Connelly.

“There are generational levels of wealth that literally flow from it in just one decade. If someone had invested around $ 55 in Ether at the ICO [initial coin offering], they would be millionaires today, ”she said. “It’s a massive community of people who are willing to give, but we don’t ask them.”

A recent example shows both the promise and the challenge of crypto-philanthropy: the co-founder of Ethereum ETHUSD,
-0.56%,
Vitalik Buterin, donated $ 1 billion in Shiba Inu SHIBUSD coins,
-0.16
to relief from COVID-19 in India in May, weeks after becoming the world’s youngest known crypto billionaire at 27.

The coin’s value plummeted after the announcement, and two months later the founder of the aid group that received the donation said “only $ 20 million had been used due to the complexity of the conversion. cryptocurrency and compliance with government regulations in India regarding assets ”, the Associated Press reported.

Well-known nonprofits such as The Salvation Army, Toys for Tots, and Save the Children are now accepting crypto donations.

The crypto donation seems to be growing in popularity. Crypto Giving Tuesday – a fundraising campaign that ran alongside the international Giving Tuesday fundraising campaign on November 30 – raised $ 2.4 million in donations for 1,007 nonprofits this year , compared to 120 in 2020, the organizers said. The traditional Giving Tuesday has raised around $ 2.7 billion this year.

If you’re a crypto investor looking to donate some of your holdings, here are five questions to ask first:

Which charities accept cryptocurrency donations?

Some studies suggest that less than 4% of charities accept crypto donations, Connelly said, but the number is growing rapidly. Well-known nonprofits such as The Salvation Army, Toys for Tots and Save the Children are now accepting it. Fidelity Charitable, the largest provider of donor-advised funds in the United States, began accepting bitcoin in 2015. This year, it had received $ 158 million in cryptocurrency assets by the end of September, a 464% increase compared to the same period in 2020.

A quick way to find nonprofits that accept crypto is to use platforms like The Giving Block and Every.org, which specialize in connecting crypto donors with charities and streamlining the process. gift.

A word of warning: Some charities may need to outsource the management of the cryptocurrency and may charge a fee to the donor because of it, so donors should educate themselves about this before continuing, Tony said. Oommen, vice president and charity planning consultant at Fidelity Charitable.

What kind of tax relief can I get for donating crypto?

Donating cryptocurrency can potentially give donors a double tax advantage: They can avoid paying capital gains taxes and reduce their taxable income, as they can deduct the full market value of the crypto.

But make sure you pick the right assets, Oommen told MarketWatch. “It makes sense to select the assets with the most unrealized gains to donate in order to maximize the benefit of a tax deduction as well as a tax exclusion,” he said.

He added: “The advantage of an exclusion is that because it is income that never reaches the taxpayer’s 1040 personal return, it is not subject to any limitation on adjusted gross income. and can be an advantage whether or not the donor details their deductions. . “

Do I have to estimate my crypto donation?

The Internal Revenue Service classifies cryptocurrency as a property, not a listed security. This means that for donations of cryptocurrency with a value greater than $ 5,000, “the tax rules state that the donor will need to obtain an independent and qualified assessment of the value of the donated cryptocurrency to justify the tax deduction. ‘he will claim on his tax. return for the tax year of the donation, ”Oommen told MarketWatch.

Donors should consider the cost of the assessment when deciding whether to donate crypto versus any other type of asset, Oommen said. For example, donors do not need to have donations of marketable securities valued to claim a tax deduction.

An example calculation: Suppose a donor decides whether they want to donate a publicly traded stock versus bitcoin BTCUSD,
+ 0.16%.
There is no cost to donate the stock, but let’s say valuing bitcoin costs $ 600. “So the relative amount of capital gains tax savings for donating bitcoin would have to be greater than the valuation cost of $ 600 to justify donating bitcoin versus stock,” Oommen said.

“For the people who use cryptocurrency, they obviously really believe in its ability to create change.”


– Anne Connelly, blockchain investor and author

When is the best time to donate cryptocurrency?

Don’t make the mistake of donating cryptocurrency that you’ve owned for less than 12 months, Oommen said.

“While not specific to cryptocurrency, many crypto investors have made significant short-term gains and may consider donating crypto that has been held for less than a year,” Oommen said. “The problem with this is that the asset must have been held for the long term in order for the donor to claim a charitable tax deduction for the full fair market value. Donations of valued short-term assets are limited to a deductible “at cost” value – in other words, the original value of the asset, before its value has increased.

There is also a timing issue to consider related to the volatility of cryptocurrencies. Although the cryptocurrency trades 24/7, the nonprofit receiving the donation can only sell the cryptocurrency on business days during business hours.

“If someone donates cryptocurrency by pushing coins to the charity’s online wallet late on a Friday, it might not sell until the following Monday and the price could have gone down. considerably over the weekend, potentially leaving far less for the charity’s mission than the donor intended, “Ooomen said.

What will the nonprofit organization do with the donated crypto?

Most nonprofits typically sell cryptocurrencies as soon as they receive them. But some crypto evangelists would feel better about their donation if they knew the organization was going to keep the crypto either as an investment or because it could be a useful tool in helping the charity deliver its services, for example. example, for projects abroad. If this is a concern for the donor, he should ask the charity before making his donation.

“For the people of cryptocurrency, they obviously really believe in its ability to create change,” Connelly said. Donors who would prefer nonprofits to keep their crypto donation should first find out if the charity “really is okay with cryptocurrency and the change it can make instead of seeing it.” just as another asset that they can accept to do their job, ”she added.