Donating Cryptocurrencies as a Tax Strategy

Selling cryptocurrencies can trigger capital gains taxes which, depending on your tax bracket and whether your gains are short term or long term, can result in a significant amount due to the IRS. One way around this is to donate coins to your favorite charity.

Let’s say you were lucky enough to buy 1 bitcoin last year for $1,000. If you were to sell at today’s price of $15,000, you would have $14,000 in capital gains to pay tax on. If for instance you are an individual making $50,000 a year placing you in the 22% tax bracket, and if you held your coin for under 1 year, your tax would be at the short term rate of 22% of $14,000, or $3,080. After paying $3,080 in tax, your charity would get $11,920.

If on the other hand you decided to give this bitcoin directly to a church or charity, you would be able to claim a $15,000 deduction from a charitable donation. By donating in cryptocurrency not only do you avoid the $3,080 capital gains tax, but your charity also receives the full $15,000 worth of bitcoin. As you can see, donating directly in cryptocurrency is advantageous to both you and your charity.

Let’s say you held this bitcoin for over a year before selling for USD and transferring cash to your charity. The tax on your $14,000 gain would be less than 22%; as a single making $50,000, your long term capital gains rate would be 15%, triggering a $2,100 tax and leaving you with $12,900 for your charity. This is better than the short term capital gains tax, but this still leaves both you and your charity with less funds left over than if you had donated this bitcoin directly to the charity without cashing out first.

You can calculate the exact amount your capital gains tax would be using the chart below. The chart is based on the new Tax Cuts and Jobs Act which recently passed, and shows first your tax rate if you held an asset for under 1 year, and second your tax rate if you held for over 1 year. Notice in the chart that your tax rate on a capital gain could be 0% if you are in a certain income bracket and you held your cryptocurrency for over 1 year. Only if you fall in this tax bracket would it be equally beneficial to both you and the charity to sell your cryptocurrency and transfer funds directly in USD.

2018 Capital Gains Tax Brackets for 2019 Tax Return Filings

Marital Status Income Tax Rate
Short-Term Capital Gain Single $0 – $9,525 10%
$9,525 – $38,700 12%
$38,700 – $82,500 22%
$82,500 – $157,500 24%
$157,500 – $200,000 32%
$200,000 – $500,000 35%
Over $500,000 37%
Married $0 – $19-050 10%
$19,050 – $77,400 12%
$77,400 – $165,000 22%
$165,000 – $315,000 24%
$315,000 – $400,000 32%
$400,000 – $600,000 35%
Over $600,000 37%
Head of Household $0 – $13,600 10%
$13,600 – $51,800 12%
$51,800 – $82,500 22%
$82,500 – $157,500 24%
$157,500 – $200,000 32%
$200,000 – $500,000 35%
Over $500,000 37%
Married Filing Separately $0 – $9,525 10%
$9,525 – $38,700 12%
$38,700 – $82,500 22%
$82,500 – $157,500 24%
$157,500 – $200,000 32%
$200,000 – $300,000 35%
Over $300,000 37%
Long-Term Capital Gain Single Up to $38,600 0%
$38,600 – 425,800 15%
Over $425,800 20%
Married Up to $77,200 0%
$77,200 – $479,000 15%
Over $479,000 20%
Head of Household Up to $51,700 0%
$51,700 – $452,400 15%
Over $452,400 20%
Married Filing Separately Up to $38,600 0%
$38,600 – $239,500 15%
Over $239,500 20%

The above examples assume your investment has been profitable. But what if you decide to donate an asset that has declined in value? Let’s say you bought 1 bitcoin at $20,000 and it is now at $15,000. If you sell you can write off $5,000. Since you can only write off a maximum of $3,000 per year, you could write off the maximum $3,000 capital loss this year and the remaining $2,000 capital loss next year. You could then donate the remaining $10,000 to your charity of choice.

If instead you decided to transfer your devalued cryptocurrency to your charity without cashing out first, you would be able to write off $15,000 as a charitable contribution but this would only kick in if your total itemized deductions were greater than your standard deduction. Cashing out first could be more beneficial depending on the circumstance as you could write off the maximum $3,000 capital loss regardless of whether or not you itemize deductions.

One final note: keep in mind the IRS taxes gifts as well if you give to a person or organization that isn’t a qualified charitable organization! If you don’t give to a legitimate charity, you can give up to the annual exclusion amount ($15,000 this year) to any number of people or organizations without triggering the gift tax. For instance, if you gave 3 bitcoins to 3 separate people, there would be no gift tax as each donation is valued at $15,000. If however you gave all 3 bitcoins to 1 individual person, the value would be at $45,000 and the $30,000 amount over the $15,000 threshold would be a taxable event. Note that for married couples, the $15,000 gift threshold is doubled.

If you have more questions on the tax implications of donating cryptocurrencies, feel free to contact us at https://denveraccountinggroup.com/contact/.

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