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. Taxes

    Donations: How To Maximize Your Tax Deduction

    Donating to charity is a great way to show your giving spirit and save money on your taxes at the same time.
  2. Managing Wealth

    It Is Better To Give AND Receive

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

    Tips for Effective Charitable Giving Before Year-End

    Before donating, here are some helpful tips to protect both your wallet and generous heart.
  6. Taxes

    Here's How to Make the Most of Your Financial Gifts

    Here are five tips for being strategic and intentional about your year-end gift giving and charitable donations.
  7. Taxes

    Donor Advised Funds: Tax Efficient Giving

    Donor advised funds are a tax efficient way to donate large sums to charitable organizations.
  8. Insurance

    Using Life Insurance To Make Charitable Donations

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

    Non-Cash Contribution Rules Could Cut Returns

    Higher standards for certain contributions could mean smaller deductions for you.
  10. Taxes

    How to Give a Tax-Saving Gift Before The Year Ends

    Giving to charity and family members before year-end can help you save on 2016 taxes.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center