iExplosive growth in digital assets has left investors with real questions about how to donate cryptocurrency and non-fungible tokens. That the tax bills are high enough to generate this interest is clear evidence of the gains such assets have made as a new investment class — both financially and in reputation. With this broad acceptance, owners of appreciated digital assets are interested in using digital assets to make tax-advantaged charitable contributions.
The Tax Benefits of Digital Asset Donations
The Internal Revenue Code (Code) provides two significant incentives for taxpayers to support charitable giving. And, these tax advantages help fuel charitable donations of more than $1 billion a day in the United States.[1]
First, a tax deduction is available for certain donations made to charities that qualify under Code § 501(c)(3).[2] Second, taxpayers who donate appreciated capital assets held for the long-term capital gain holding period receive a charitable deduction in the amount of the appreciated asset’s fair market value, subject to a percentage cap based on their adjusted gross income.[3] Donors do not need to pay tax on the appreciation in the donated property because charitable contributions are not treated as taxable sales or exchanges of the donated property. Donors will receive a tax deduction, however, only if they itemize charitable deductions on their tax returns and meet the other tax requirements.
Will Charities Accept Crypto Donations? NFTs?
Although there are now close to 9,000 different types of digital assets,[4] charities are typically only interested in receiving those digital assets that are convertible into a fiat currency, such as the U.S. dollar. This is because they are likely to want to convert digital assets into dollars as soon as possible to avoid the risk of a decline in market value. An exception to this generalization is the receipt of art NFTs donated to art museums.
Some charities accept digital asset donations to create a positive buzz among a prospective new donor base of holders of appreciated digital assets. Other charities are considering whether to implement a digital asset donation program.
An entire industry has developed to service digital asset donors and eager recipient charities. Third-party providers can assist with the solicitation and acceptance of digital asset donations, streamlining the administration of the donations and making the entire process easier for donors and charities.
Leveraging a Donor Advised Fund
There is a “middle road” for charities that want to encourage digital asset contributions but do not want to implement the policies and infrastructure needed to accept digital assets. These charities might encourage donors to make their contributions through a donor advised fund (DAF). Subject to the terms of the donor’s agreement with the DAF administrator, donors can contribute cryptocurrency to their DAF account. The DAF administrator is likely to immediately convert the digital assets to dollars (subject to the policies of the DAF administrator), and then donate dollars (or another fiat currency) to the charity. A third-party DAF administrator hosts the DAF on its platform and the donor account is subject to the rules of that administrator.[5]
When digital assets are contributed to a DAF giving account, the donor immediately receives a charitable deduction equal to the fair market value of the donated property (subject to any percentage caps based on the donor’s adjusted gross income) because the contribution is made to a qualified charity. The donor then recommends to the DAF administrator the charitable recipient that should receive the donation. The ultimate donation is processed, subject to the terms of the agreement between the donor and the DAF administrator. This means there can be a time lag between the donor’s contribution and the DAF’s actual distribution to the recipient charity.
As digital assets become a popular new asset class, taxpayers accumulating appreciating portfolios are likely to explore new ways to make charitable contributions. To receive the tax benefits, however, donors and charitable organizations must take steps to ensure that these donations meet IRS requirements.
[1] Giving USA, $484.85 billion: In 2021, Americans gave $484 billion to charity, a 4.0 increase over 2020, www.givingusa.org/wp-content/uploads/2022/06/GivingUSA2022_infographic.pdf, site visited February 19, 2023.
[2] Public charities under Code § 501(c)(3) include, in part, entities organized and operated exclusively for religious, charitable, scientific, public safety, literary, educational purposes, amateur sports competition, and the prevention of cruelty to children or animals. Donations of property are subject to a cap on the percentage of a taxpayer’s adjusted gross income. Deductions for contributions to donor-advised funds are also capped.
[3] Although there have been beneficial changes to charitable deductions under the 2020 CARES Act, deductions of noncash property are capped to a percentage of an individual taxpayer’s adjusted gross income. Deductions for contributions to donor-advised funds are also capped.
[4] CoinMarketCap, Today’s Cryptocurrency Prices by Market Cap, https://coinmarketcap.com (January 15, 2023).
[5] Fidelity Charitable, What is a donor-advised fund?, Fidelity Charitable, https://www.fidelitycharitable.org/guidance/philanthropy/what-is-a-donor-advised-fund.html. Schwab Charitable, “Strategies for Maximizing Your Charitable Impact in 2021,” Feb. 9, 2021.
See Also:
Accepting Cryptocurrency and Digital Asset Donations: What Charities Need to Know
