IRS Guidance

The IRS has released guidance regarding virtual currencies such as Bitcoin in 2014 and 2019. Most importantly, it clarifies that, for tax purposes, virtual currency (in particular cryptocurrencies) shall be treated as personal property, similar to art, vehicles, or physical collectable coins.

While this classification does place a burden on users of virtual currency—every single transaction is a taxable event subject to capital gain (or loss)—it is actually very favorable with respect to claiming charitable deductions for federal income tax purposes. In particular, by donating a cryptocurrency held for more than 12 months directly to a 501(c)(3) public charity, one both avoids paying capital gains tax on the increase and gets to deduct the entire Fair Market Value of the coins on the date of the donation.^[1]

Hypothetical Example

Suppose that Amy purchased 3 Bitcoin in May 2020 for $9000 each. In December 2023, Amy noted that the coins had risen to $42,000 each, and wanted to make a donation to her favorite (qualified public) charity. If she sold all 3 BTC for a total of $126,000, based on her cost basis of $27,000, she would owe $23,562^[2] in taxes, which would make a substantial dent in the amount left to donate.

Being a tax-savvy individual, she instead chooses to gift the Bitcoin directly to the charity which receives the full $126,000. In addition Amy can itemize the full Fair Market Value of $126,000^[3][4] when she files her taxes.

Not only does Amy get to give more to the cause she loves, she also is able to deduct more when it comes time to file taxes.

Paperwork

Understandably, the IRS requires specific documentation to avoid abuse of this system. Specifically, if the aggregate Fair Market Value of all donations of a specific asset class exceed $500, Amy must fill out Form 8283 enumerating and stating the value of the gifts. This is all fairly standard and any competent tax software or tax advisor can handle the details here with ease.

However, if the gift(s) value exceeds $5,000 neither the donor nor the donee is allowed to declare the Fair Market Value.^[5] Instead, an independant Qualified Appraisal is required, with the Appraiser signing Form 8283 asserting the Fair Market Value of the gifts. This is the step that we make easy.

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[1] See in particular the answers to questions #33 and #34 of the IRS FAQ on virtual currencies.

[2] Assuming a 20% long term capital gains tax rate plus 3.8% Medicare surtax on the $99,000 capital gain.

[3] Note that due to volatility in the markets, the Fair Market Value (FMV) may differ slightly from the actual proceeds the charity gets the moment it chooses to liquidate the assets.

[4] Subject to the 30% AGI and other applicable limits, easily handled by any competent accountant or standard tax software.

[5] See IRS instructions on charitable deductions.