Last month, the U.S. Congress increased tax benefits for charitable donations in the CARES Act in the hope that people will give more. Some donate money, others donate property, and a growing number have been donating crypto assets.
Once you have made the difficult decision of which charity or cause to donate to, your focus should shift to your tax position. There are certain things to keep in mind when donating crypto assets, particularly considering how their volatility can affect your taxes and your decision-making.
The charity behind Give.org launches a blockchain-based donation platform
What crypto asset should I donate?
Generally, giving a donation in crypto does not trigger a taxable event for donors or recipients. Therefore, after donors decide how much they want to donate, they must also decide which assets to donate. Giving assets with a low tax base may reduce or minimize future taxable income, while the donor retains assets with a higher tax base. Entities that are tax-exempt in the United States because of their educational, charitable, or other activities („charity“) are often indifferent to the tax base of the assets they receive. This is because they are normally exempt from income taxes on assets sold to fund their charitable activities.
If the recipient of the gift is not tax-exempt in the U.S. – that is, it is a „non-charity“ – they will probably be concerned about the tax base of the asset being given to them. This is because the donor’s tax base on the donated assets is often – but not always – transferred to the non-charitable entity. Thus, if the donor wishes to give priority to his own tax position over that of the non-charitable entity, he will donate the crypts with the lowest tax base. Conversely, if the donor wishes to prioritize the benefits of the donation to the non-charitable organization, he will give the crypts with the highest tax base.
Does my donation of crypts have a built-in loss?
Crypt assets have an embedded loss because their tax base is greater than their current market value; therefore, a donor may wish to sell the crypto currencies for cash (with a loss of principal) and then donate that money to a The News Spy charity or non-charity. The donor can use this loss of capital to offset any capital gains taxes he may have on transferring the same value to the charity or non-ch charity.
If a donor makes a gift of crypts with an embedded loss to a non-charitable organization, the possible tax deduction of the embedded loss is lost. This is because the general rule that transfers the tax base from the donor to the gift recipient does not apply in the case of assets with an embedded loss that the gift recipient sells at a loss. Instead, the tax basis of the assets sold by the gift recipient is limited to the fair market value of the assets at the time of the gift.