The trend of cryptocurrency donations such as Bitcoin has witnessed a significant rise along with the increase in the value of these digital currencies. High net worth individuals and investors are increasingly looking towards this avenue as a means to save on the taxes on their cryptocurrency gains.
Fidelity Charitable, a leading provider of donor-advised funds (DAFs), reported receiving contributions in cryptocurrency amounting to a staggering $688 million until November 19, witnessing a year-on-year growth of 1,300% from $49 million in 2023.
The value of Bitcoin has seen an appreciation of over 133% since the start of the year, with its price crossing $100,000. Donating valuable assets with a high appreciation value such as cryptocurrencies, stocks, and bonds, and has potential tax benefits, experts believe.
DAFs, or charitable investment accounts sponsored by a nonprofit, are recommended for those inclined towards charity. Brett Koeppel, a certified financial planner and the founder of Eudaimonia Wealth, explains that on contributing to these accounts, one can bypass future unrealized gains and receive a tax deduction in the year of contribution.
Assets with more than a year of hold-time directly donated to either a charity or DAF helps avoid the long-term capital gains tax, which could be as high as 20%. If tax deductions are itemized, the contributor can also deduct the fair market value or the asset's current worth at the time of donation, capped at 30% of their adjusted gross income.
Over half of the contributions to Fidelity Charitable in 2023 were non-cash assets like stocks, with this tax-saving strategy gaining popularity. However, once assets are donated to a DAF, they cannot be retrieved, Koeppel emphasized.
In recent developments, organizations including the fintech provider of DAFs, Daffy, have partnered with trading platforms like Robinhood to enable users to donate held cryptocurrencies to Daffy accounts. Some nonprofits and charitable organizations now accept cryptocurrency donations directly.
Concerns arise when donating cryptocurrencies because not all charities accept them, and larger donations require qualified appraisals due to their fluctuating value, said Kevin Brady of Wealthspire Advisors. The IRS also mandates a qualified appraisal for donated digital assets worth over $5,000 and completion of form 8283, highlighting a risk associated with donations of volatile assets like cryptocurrencies, which may depreciate abruptly.