1. Bitcoin Tax Guide: An Introduction
  2. Bitcoin Tax Guide: Trading Gains And Losses - Fair Market Value
  3. Bitcoin Tax Guide: Trading Gains And Losses - Alt-Currencies
  4. Bitcoin Tax Guide: Trading Gains And Losses - LIFO, FIFO, Offsetting Lots
  5. Bitcoin Tax Guide: Trading Gains And Losses - Wash Sales: Impossible To Track?
  6. Bitcoin Tax Guide: E-commerce Taxation
  7. Bitcoin Tax Guide: Donations
  8. Bitcoin Tax Guide: Gifts And Tips
  9. Bitcoin Tax Guide: Lost Or Stolen Bitcoins

No good deed goes unpunished, especially when you are talking about Bitcoin donations. Odds are that if Joe made a donation to a charity in the past year, either he or the charity will have likely incurred a hefty tax liability. Three scenarios have presented themselves to date.

In the first and most common scenario, Joe's preferred 501(c) charity (an organization approved by the IRS to collect tax-exempt donations) may not have created Bitcoin wallets or merchant accounts with services like Coinbase or BitPay. So if Joe cashed out some of his bitcoins to make a donation, he would be on the hook for those capital-gains taxes, even if the proceeds were earmarked for the express purpose of a donation. When Joe sold assets to make his December donation, he incurred either a 15% or 25% tax liability depending on which bitcoins he sold. But the good news is that he can also turn around and write off that entire donation against his ordinary income to the full extent allowable by law - in most cases up to 50% of his adjusted gross income.

In the second and optimal case, Joe might give to a registered charity that actually has a Bitcoin wallet address, and perhaps even a merchant account with a third-party service provider. This would offer him (and by extension, the charity) the most favorable tax case, assuming he donated assets that were held for longer than one year. (Note: If Joe planned to donate bitcoins that had accrued short-term gains, he would actually be better off cashing them out first and donating the proceeds under the first scenario. Otherwise, he might only be able to write off his cost basis. For instance, if Joe donated bitcoins purchased in January 2013 at $20, he would write off his $20 cost basis rather than the $900 fair market value at the time of his December donation. Ouch.)

That's because the IRS allows him to write off the full fair-market value of donated property, which has been held for longer than a year (up to 30% of his adjusted gross income), without him or the charity paying any capital-gains taxes - huge win for Bitcoin investors and charities alike. In exchange for the tax benefit, there is one small bit of hassle; the recipient charities would need to file a Form 8283 showing their estimate of the fair-market value of any property contributions greater than $500, and Joe would also be required to file Form 8283 with his federal income-tax returns for cumulative property gifts exceeding $500 for the year.

The final scenario presents the toughest one for both donors and "charities" to track. In this case, donors make Bitcoin gifts to organizations that may have charitable purposes, but for whatever reason are not yet approved by the IRS. Parties that have applied for tax-exempt status, but have yet to receive approval, such as the BitGive Foundation, may be on the hook to pay capital-gains taxes on donated property in the event their application is denied. Such an organization would need to know its donor's cost basis on the donation to accurately pay any capital-gains tax liability under "gift" tax laws. Joe might be able to write off his donation retroactively, if and when BitGive's "pending" 501(c) status is approved, but he runs the risk of not receiving any write-off for the full market value of his donation if BitGive is denied tax-exempt status. In fact, under those same "gift tax" laws, he himself might incur an additional tax liability.

Bitcoin Tax Guide: Gifts And Tips

Related Articles
  1. Managing Wealth

    It Is Better To Give AND Receive

    You give to benefit others, but there can be perks for you too.
  2. Taxes

    Deducting Your Donations

    Generosity may be its own reward, but some charitable giving also provides personal tax benefits.
  3. Taxes

    6 Reasons to Donate Your Car to Charity

    It's no longer a free ride, but there are still tax benefits to doing so.
  4. Taxes

    5 Warning Signs a Charity Is a Scam

    Giving to charities and helping those in need is admirable. Here's how to ensure your good intentions and donations aren't siphoned off by scammers.
  5. Managing Wealth

    5 Top Charities to Donate to This Holiday Season

    The holiday season is the perfect time to make charitable donations. Here are the top five charities to donate to this season.
  6. Insurance

    Using Life Insurance To Make Charitable Donations

    Your life insurance policy can be a great tool for charitable giving. Find out how.
  7. Financial Advisor

    Top Tips for Maximizing Charitable Deductions

    Charitable donations can be a great financial planning tool. Here are some ways to make the most of them.
  8. Financial Advisor

    Non-Cash Contribution Rules Could Cut Returns

    Higher standards for certain contributions could mean smaller deductions for you.
  9. Insights

    Top 5 Corporate Donors in Retail (WMT, GOOG)

    Discover the five largest donors in the retail sector as measured by cash contributions, including the company that donated more than 50% of the group's total.
  10. Taxes

    Give To Charity; Slash Your Tax Payment

    Being generous has never been more (financially) rewarding!
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center