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
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