Crypto gets a bad rap for being too complicated for the layman. Add in the layer of taxation on top of it, and even the most charitable among us can be reluctant to donate to noble causes.
When it comes to taxes, 57 percent of Americans aren’t literate or confident in their understanding of the law. This has been exasperated by changes to the tax code over the last few years. At the same time, charitable giving is at an all-time high, rising 5.2 percent in 2017.
These numbers reveal a potential knowledge gap. As we’ve seen with GiveCrypto, many donors don’t fully understand the tax implications (and benefits) of their charitable gifts. Unfortunately, the IRS’s ever-changing stance on how to account for crypto assets further complicates things.
There are a number of benefits to donating in cryptocurrency:
- Saving in taxes by avoiding state and federal taxes on your donation
- Secure giving to charities you love
- Avoiding unnecessary tax leaks
For this article, we sat down with Alex Roytenberg, CPA. Alex is based in New York City and has experience working with companies and individuals on crypto activities. Over the last fifteen years, he has worked on Wall Street and public accounting firms such as Morgan Stanley, Goldman Sachs, PwC, and Marshall Wace.
We met up with Alex to discuss the following key things to keep in mind when donating cryptocurrency to charity, and what the future of crypto taxation under the IRS may look like.
Much like fiat currency, your tax obligation with cryptocurrency depends largely on how you’re using it. Are you donating it? Holding assets with it? Using it for everyday purchases?
The IRS guidance can be confusing. Let’s break it down to what you need to know: Generally speaking, the IRS currently views it as a property asset across these uses.
The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset.
This means assets are subject to capital gains and losses similar to things like bonds, stocks, gold, and real estate. Gains and losses are calculated by subtracting your cost basis from the fair market value.
What kind of asset your crypto is classified as depends on how long you hold it and what it’s being used for. This breaks things down into three categories:
- Long-term asset (crypto you hold for more than a year): These assets are taxable at 0 percent, 15 percent, or 20 percent, depending on your income and filing status. This tax rate is typically lower than short-term assets.
- Short-term asset (crypto you hold for less than a year): This asset class is taxed at ordinary income tax rates that depend on how much you make and what your filing status is.
- Ordinary asset (assets used for business purposes): This refers to crypto you use for everyday purchases and transactions, or if you’re in the business of generating or trading crypto. This is also taxed based on your regular tax bracket and on your income and status. The ability to deduct some losses might be limited depending on your circumstances.
When it comes to how crypto charitable contributions are different from how fiat contributions are taxed, the answer is: it depends.
In terms of gains vs. loss, things can get a little muddy. Technically, the IRS says you can’t realize a gain or loss from the exchange of currency when you go from crypto to fiat funds. This means that you will pay taxes on your funds if you sell from, say, BTC to USD as you’re crossing over from a property asset to a currency.
Finally, a lot of the questions people have surrounding crypto gains and losses surround the moment of a transaction. Officially, the IRS believes that each separate transaction should be treated as a taxable event. This means that every time you use crypto as an ordinary asset to order a pizza or buy something online, you should have a gain or loss on the transaction.
This brings us to one of the hottest button issues of crypto tax law: how transparent you should be about when and how you’re using virtual currency.
While crypto enthusiasts may have an erroneous reputation for trying to skirt the system, the reality is many people just don’t know what qualifies to be reported or not. With news of the IRS cracking down on 10,000 crypto owners for back taxes, it’s more important than ever to accurately report your holdings.
That means that when it comes to reporting, there’s really only one smart option: do it.
The way Alex looks at it, crypto is just another form of currency. Just like the dollar, Euro, or Sterling, you should be reporting how much value you hold. Just because it doesn’t go through a bank and the IRS may not see all the details of your transaction, doesn’t mean that your liability is any different.
In response to people failing to report their crypto assets, the IRS has started sending out Letters 6174, 6174-A, and 6173. Here’s a quick breakdown of what each means and what you need to do if you were sent one:
- Letter 6174: You likely didn’t report all your transactions and may need to check your tax return and file an amended return to correct the issue. This letter doesn’t require a response and won’t be followed up on.
- Letter 6174-A: There may have been a misreporting of transactions and the IRS may follow up. No response is required if you think you’re in compliance, but the IRS may use it as grounds to audit you in the future.
- Letter 6173: This is the most concrete of the letters and requires a response. It will include instructions on responding to the IRS and what sections of your return must be amended, such as trading, investing, receiving, or transactions. The IRS will follow up on these letters to make sure you’re in compliance.
As the IRS gets more determined to hold crypto users accountable for the money they own, the system will change. Currently, it’s kind of a high honor system for people to report. But the agency will likely up the frequency of audits, particularly if they feel like an example can be made.
The highest goal of donating to charity is, for many people, to make the world a better place. But beyond doing good, donating with crypto can save you money on taxes and avoid unnecessary tax leakage from federal and state taxation.
Ultimately, there are two things to keep in mind to make your money go further:
- Give crypto directly to charities that accept it.
- Use a donor-advised fund structure to donate crypto funds to organizations that don’t directly accept it.
When valuing your crypto, you should use the price that the coin was worth at the time of your transaction, donation, or trade.
So say you donated crypto at $18,000 per coin, but then days later, it went down to $5,000 per coin. On your taxes, your donation would be counted at the higher amount. Like stock, what happens to the value after the charity takes ownership is on the charity themselves, whether that’s a gain or a loss. This means that your gains and losses aren’t affected if the charity doesn’t immediately cash the crypto in and instead holds it until the value is higher or lower.
It’s worth noting that because of crypto’s property status, any property valued at more than $5,000 should receive a qualified appraisal to have an official estimate of its value. Advocates are pushing for crypto to be exempt from this rule, like publicly traded securities are.
Additionally, your money goes further with crypto instead of fiat because of tax valuation. When donating fiat cash, your donation is susceptible to both federal and state taxes, taking away from the amount you can deduct and the amount the charity receives. This isn’t the case with crypto.
For example: if you donate $100,000 of crypto with a basis near $0 after converting it into cash, you will only be able to donate approximately $64,000 (assuming a 24 percent tax of Long Term Capital Gain for Federal and another 10–12 percent in State Taxes). However, if you donate $100,000 in crypto directly (without trading to cash before donating), you save on taxes by having all of that amount go toward your deduction and the organization.
This nuance is why it’s most beneficial to focus on organizations that have the infrastructure to accept crypto. However, it is possible to donate crypto to fiat-only charities if you really believe in their mission and want to help.
The tax strategy that Alex uses with his clients is to use a donor-advised fund. Donors add crypto to this fund as if they were donating directly to a charity that accepted virtual currency. The fund is then able to distribute payments to charities in fiat cash, taking on the tax implications, including gains and losses. This way, the charity receives money as they normally would, and the donor isn’t unnecessarily penalized for going from crypto to fiat.
Recently, tax reform has limited the state and local deductions that can be claimed across currency types. The threshold for the standard deduction you have to reach has increased, which may create a gap between the amount of your itemized deductions and the standard deduction.
To avoid tax leakage, Alex helps his clients with highly appreciated currency to set up a multi-year donation schedule to ensure they get the most mileage out of the tax law.
Things change quickly in the world of tax law. Recent IRS focus on enforcing regulations on those that may not have disclosed their crypto assets up to this point show that virtual currency is an ever-growing area of focus for the agency. And, as the popularity and infrastructure around crypto continue to expand, people can expect to see even more regulations pop up.
Alex expects that the IRS will issue new crypto guidance in the coming months. While he can’t say for certain what that will be, he and other tax experts have a few educated ideas.
“If we would’ve discussed this two or three weeks ago, I would have said they’ll…continue to treat it as capital assets and give it a somewhat favorable position,” he said in our interview.
However, Alex doesn’t think this will measurably shift people’s use of crypto generally, or in the charity space.
Those that are die-hard fans of cryptocurrency will continue to hold and use it. These individuals are constantly monitoring the technology, what they can use their funds for, and the overall future of it both in and outside the US.
“It’s a matter of what you believe the drivers of crypto are and whether you believe those drivers are going to be positive or negative going forward,” he added.
At GiveCrypto, we go beyond just accepting crypto for charitable work. We embrace cryptocurrency and blockchain technology from the bottom up, empowering our recipients to learn to use crypto to build small-scale crypto economies in regions where government oversight, charitable efforts, and financial systems have failed them.
To this end, we’ve set our sites on empowering individuals and families in Venezuela. We believe that the best way to do good is to connect with those in need and give them the autonomy to help themselves. This mission is backed by world-class platforms built by Coinbase and our team.
GiveCrypto and Alex Roytenberg, CPA are not providing tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.