Why Now & How: Cryptocurrencies

Exploring charitable gifts of Bitcoin and other virtual currencies

The dramatic rise in the value of cryptocurrency has garnered a lot of attention in the media. The novelty and low cost attracted many investors in the early days. The value of the most popular cryptocurrency, Bitcoin, has grown exponentially in the last 10 years.

Those who hold cryptocurrency as part of their portfolio may be wondering how they might further leverage this asset. This article explains why now is a good time to consider donating cryptocurrency to charity, and how to make such a gift.

First, what is cryptocurrency?

Cryptocurrency is known as digital or virtual currency. The first cryptocurrency to be introduced to the public was Bitcoin. Bitcoin was created in 2009 based on ideas, published under the presumed pseudonym Satoshi Nakamoto, of a currency held strictly online and not regulated by any government. An individual Bitcoin is referred to as a “token,” and can be purchased with real dollars. A “wallet” is an online app or hardware device that facilitates trading and allows users to track ownership of tokens. Investors make cryptocurrency transactions using a decentralized, public and transparent ledger, called blockchain, to which all investors have access.

At the time of its creation, Bitcoin was valued at $0.0008. The first price increase occurred in 2010 when the value of a single token increased to the appreciable value of $0.08. The price of Bitcoin is volatile, owing to investors’ tolerance for risk, integrity concerns given the lack of oversight by government or banks, and abusive scams and frauds.

Despite these difficulties, the value of Bitcoin has grown precipitously. As this article is being posted, Bitcoin is hovering near an all an all-time high of over $44,000. The popularity of Bitcoin has spawned the launch of thousands of other cryptocurrencies that are now in circulation.

Why donate cryptocurrency to charity now?

Investors who have held their cryptocurrency for the long term, and who may have a portfolio allocated more to cryptocurrency than they are comfortable with, can consider donating a portion of their holdings to charity. While cashing out of holdings might seem attractive to some investors, it could come with a hefty capital gains tax bill on the appreciation.

In some ways, the IRS treats cryptocurrency like stock or property, not like cash. Therefore, the profit from a sale of cryptocurrency held less than one year (short-term capital gains) will be taxed at the same rate as ordinary income.

If the cryptocurrency is held for more than one year when sold, the investor will have to pay long-term capital gains tax. Long-term capital gains tax rates are 0%, 15%, and 20%, depending on the investor’s income. (Some taxpayers will pay an additional 3.8% surcharge imposed by the Affordable Care Act). While these rates may be lower than ordinary income tax rates, they can still result in a significant tax bill, especially when the investment has earned a lot of profit.

When a donor gives cryptocurrency, stock, or other property to charity, the donor may realize a two-fold tax benefit. First, the donor will not recognize the capital gains for tax purposes. Second, if the donor has owned the asset for longer than one year, then the donor will receive a charitable tax deduction for the fair market value of the donated asset. The charity will then sell the asset, but will not have to pay taxes on the profit because the charity is tax-exempt. Therefore, the full value of the gift will benefit the donor’s preferred cause.

How to donate cryptocurrency to charity

Talk to your financial advisor and/or CPA. A financial advisor who has an overview of your portfolio and financial goals should be able to assess what assets you might donate to charity. You should also discuss tax strategy with your accountant. Because the IRS treats cryptocurrency like stock and other property, you may need to obtain a “qualified appraisal” (as defined by the IRS) in order to claim your tax deduction. Your financial advisor or CPA may be able to help you identify a “qualified appraiser” who can provide that.

Talk to the gift planning team of the charity that you support. Many large charities, including Duke, have a wallet equipped to receive direct donations of cryptocurrency. Alternatively, some donor advised funds (DAFs) are willing to accept cryptocurrency; the DAF would convert it to dollars for easy transfer to another charity. Reportedly, in 2020, donors contributed approximately $26 million in Bitcoin to the Fidelity Charitable donor advised fund.

Cryptocurrencies are a complex asset. With smart planning, the philanthropic-minded investor can leverage the asset for significant impact for the charitable organizations that they support.

TAGS:

About the author

Tia Barnes J.D.’03

tia.barnes@duke.edu

Tia comes to the Office of Gift Planning from Duke Law School where she served the Duke community in various roles for 14 years, most recently as the assistant dean for academic affairs. As an associate director of Gift Planning, Tia works with Duke alumni and friends to explore tax-wise giving strategies, including those involving estate and retirement planning. Tia earned her law degree from Duke and her undergraduate degree in journalism and mass communications from the University of North Carolina at Chapel Hill. She lives in Durham with her family.