Bitcoin is an investment in a better future, but there are plenty of opportunities to use your Bitcoin to make positive impacts today. Donating Bitcoin to charitable organizations can be an excellent strategy for making a difference while reducing your overall tax burden.
I’ve personally donated Bitcoin to charity before, and I intend to do so again. However, there are some points to consider before your gift is signed, sealed, and delivered. Here’s a short primer to using your Bitcoin for philanthropic purposes.
Stop and Think Before You Sell
Once you decide to donate, your first instinct might be to sell Bitcoin and give the organization the proceeds, but this could leave you with a hefty tax bill.
In the United States and many other nations, Bitcoin is treated as an asset for tax purposes, much like stocks, bonds, and collectibles. This means when you sell Bitcoin for a profit, you’re expected to pay taxes on your capital gains. Capital gains taxes surprise investors every year. If you’re selling large amounts of Bitcoin, your tax liability could be significant.
To avoid this trap you’ll want to donate your Bitcoin directly to charitable organizations. Your gift will go further and you’ll be able to reap the advantages of the tax deduction while avoiding the disadvantages of triggering capital gains taxes.
Today, there are many charitable organizations that already accept Bitcoin, including some that support open source Bitcoin development. For those interested in giving, I’ve listed several organizations and helpful resources on my website.
Prepare for Paperwork
If you want to claim a Bitcoin donation as a tax deduction, you need to go through the appropriate channels and have the proper documentation in place. The IRS requires that donors claiming deductions of over $500 on noncash donations file Form 8283.
Obtain a Qualified Appraisal
Getting a qualified appraisal is a crucial step for larger donations.
Working with a qualified appraiser allows you to provide clear documentation on the fair market value of your donation. Bitcoin’s price can fluctuate, and it’s not enough to simply point at a chart. A qualified appraisal is a must-have if you’re donating over $5,000 worth of Bitcoin in a given year. It’s basically some additional information that needs to be filled out on Form 8283.
An appraisal can cost several hundred dollars, so it’s not worth doing if the sum of your donations is under the threshold set by the IRS. You can find appraisers and related tax accounting resources on my personal website.
Be Ready for Dialogue
Although Bitcoin has been around for more than a decade, it is still new to the world of charitable giving. Nonprofit organizations are steeped in the world of legacy finance, so don’t be caught off-guard if an organization is not accustomed to accepting Bitcoin. You might be the first to ask, and there may be some education involved.
Well-established charities tend to have a lot of formal structure around their finances, so donating Bitcoin may require some stakeholder approval. It’s common for organizations to have an investment committee or board to decide on financial matters, and capital allocation rules are sometimes reflected in organizational by-laws. For instance, an organization’s by-laws may require it to convert Bitcoin into cash rather than hold it on its balance sheet. Organizations have to tread carefully with financial rules to keep their tax-exempt status.
Can’t convince your favorite organization to accept Bitcoin directly? Don’t worry – you can donate dollars while still successfully liquidating your BTC without incurring capital gains! Just set up a donor advised fund with Fidelity Charitable. They will accept your Bitcoin directly and you can get a qualified appraisal for that donation. Then you can instruct Fidelity how to then donate the dollar denominated proceeds to the charity of your choosing.
Know Where Your Gift Will Go
The most fulfilling part of donating Bitcoin is seeing the impact. If you have a specific vision in mind, you need to communicate it to the charity to ensure your gift is earmarked accordingly. Charities tend to use unclassified gifts for their own fundraising initiatives. It’s perfectly fine to provide general support as long as you’re prepared.
Support doesn’t have to be a one-time event, either. Donor-advised funds also allow you to make a long-term gift to an organization. With this type of arrangement, the organization can manage the investment on paper, and you or your heirs can make recommendations for the grants and initiatives it goes to. This setup gives you the freedom to leave a legacy across generations for a deeper impact.
Bitcoin is better money for a better world. Charitable giving allows you to follow through on that promise and reduce your tax liability. It’s a win-win for everyone!
Read original article on Forbes