Ah, December. We always have the impression that this month is creeping up on us. For many, this is the last chance to have an impact on their tax planning. But in the year-end rush, there’s a lot to consider.
The past 18 months have been a wild ride in the capital markets. From the lows of March 2020 to the highs of the past few months, investors have done incredibly well. Other investors who fearlessly entered the crypto market a few years ago could end up with big gains.
And this is where taxes can get tricky.
“Think of cryptocurrency as a stock. Sell it in less than a year with a payoff, and that’s ordinary income. Over a year, and it’s taxed at the long-term capital gains rate, ”says Adam Markowitz, EA and Vice President, Howard L Markowitz PA, CPA
While acknowledging a gain may seem like the only option available to crypto investors, a unique tax planning opportunity is available: the ability to use your crypto holdings to donate to charity. As crypto becomes mainstream in investment wallets, more and more Donor Advised Funds (DAFs) and charities are accepting these holdings as part of their donations.
For many, this will be an important planning opportunity, but just because it’s allowed doesn’t mean it’s easy. There are a few rules of conduct that crypto investors should consider when donating to charity.
Before discussing how crypto can be donated, it is important to understand the mechanics of donating non-cash assets to charities.
“In addition to cash donations, individuals, partnerships and corporations are entitled to a charitable deduction on their tax returns for donated property,” says Lorilyn Wilson, CPA and CEO of Lookahead LLC and DueNorth PDX.
Listed securities are commonly given non-monetary items. In this situation, investors can enjoy a special two-part tax benefit. First, they don’t have to recognize the capital gain; second, they get a charitable deduction when the proceeds go to the charity or donor-advised fund.
“But there are rules. For donated goods with a combined value of over $ 500 (think goodwill donations, cars, etc.), an additional form called Form 8283 must also be completed, ”Wilson explains.
For listed securities, only Part I of the form is required.
“The IRS requires that you take the charitable deduction at the fair market value of the donated property – and this is the form used to do so,” Wilson explains. “Questions such as the name of the organization to which the donation was made, the description of the property, the date the property was acquired and brought in, how much it cost and what is the resale value – are all information collected on this form. “
Donating stocks can be a powerful tax management tool, but charities and CFOs have always been nervous about crypto. Things are changing and the door to donating crypto is now open.
Be aware of the evaluation rules
Donating crypto is not as easy as donating publicly traded stocks. The crypto world has not been transparent and the donation rules reflect this.
“Now let’s say someone decided to donate their crypto or other unlisted securities. Could they artificially inflate the value of their donated property to get a higher deduction and pay less tax? As usual, the IRS is one step ahead of them, ”Wilson says.
That is why it is important to know another set of rules surrounding the Form 8283. Unlike publicly traded securities, a cryptocurrency donation that exceeds $ 5,000 will require a qualified appraisal. Neither the IRS nor the SEC have taken an official position to treat cryptocurrencies like securities. The IRS has designated cryptocurrency as property, not currency.
A qualified appraisal must meet IRS requirements, including the need to hire a qualified appraiser who has met the education and experience requirements. Qualified appraisers are usually licensed or certified in the state in which the property is located.
In addition, the expertise must be made no more than 60 days before the donation and no later than the due date of the income tax return, including extensions. The appraisal is reported on Form 8283 and the appraiser is required to sign the form. No evaluator? No deduction.
It can be difficult to find a crypto appraiser, but as the technique grows in demand, there are more resources available. Investors who use a fund advised by donors like Schwab Charitable or Fidelity Charitable can also benefit from their expertise.
Investors should plan to spend around $ 500 to $ 1,000 on valuation fees, but the tax benefit may be worth it.
Check with your tax professional
Ultimately, crypto investors should seek the help of their tax advisor to ensure they are taking the appropriate steps to donate the crypto to a CFO. It could mean the difference between a great tax planning experience and the disappointment of a denied deduction.