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

As bitcoin and other cryptocurrencies have soared in popularity, so too have the net charitable donations made using these tokens and currencies climbed. And yet, for investors making donations to charities in bitcoin, there remains the possibility of a sizable tax liability. There are three potential scenarios for this situation.

 

The first scenario is also the most common. A bitcoin user makes a donation to a 501(c) charity that enjoys IRS approval to collect tax-exempt donations. However, this charity has not yet set itself up to accept donations via bitcoin, so the investor must cash out some of his or her bitcoins in order to complete the donation. In this case, the investor would be beholden to capital-gains taxes, even though the proceeds were ultimately destined for the charitable donation. Thus, a sale of assets used to facilitate a donation would incur either a 15% or a 25% tax liability, depending upon which coins were sold. On the other hand, though, that donation is still considered tax-exempt, and so the investor could then write off the donation against ordinary income to the degree that the law allows.

 

The second scenario is more beneficial for the investor. In this case, the investor is able to make donations directly in bitcoin without having to cash them out first. Both the donor and the charity would thus be in the most favorable tax situation, so long as the donor provided assets that were held for longer than a year. (Bitcoins that have accrued short-term gains might prompt a reverse situation, in which the donor would be better off cashing them first and donating the proceeds as in the scenario above.)

 

The reason for this second scenario is that the IRS allows donors to write off the entire fair market value of donated property which has been held for over a year (up to 30% of adjusted gross income) without stipulating a capital-gains tax. The recipient charity would be required to file a Form 8283 to provide an estimate of the fair market value for any donation above $500, and the donor also has to file a Form 8283 along with federal income-tax returns for cumulative property gifts above $500 for a single year.

 

In the third and most complicated scenario, a donor provides a gift of bitcoins to an organization without IRS approval for tax-exempt donations. If the charitable organization has applied for tax-exempt status but has not received approval, it may be required to pay capital-gains taxes if the application is eventually denied. In order to do so, this organization would have to keep tabs on the cost bases for any donations in order to file accurately. If the 501(c) status is subsequently approved, the donor and the charity may be able to write off the donations retroactively.

 

What about other types of digital currency gifts? That’s coming up in the next chapter of our tutorial.

 


Bitcoin Tax Guide: Gifts And Tips
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