This year is well on the way to becoming a record year for Bitcoin donations as more and more donors learn about the tax benefits of donating Bitcoin instead of fiat. Why are so many high net worth individuals giving great gifts in stocks or Bitcoin instead of donating in fiat? Usually it’s all about taxes. If you’re donating bitcoin that is considered owned by the IRS for tax purposes, donating valued bitcoin is probably one of the most tax efficient ways to support your favorite bitcoin-friendly charity. Why? Think of it like donating dollars before taxes. When you donate Bitcoin directly to a 501c3 nonprofit, you (the donor) owe no capital gains taxes and can write off the donation’s fair market value. When you sell your Bitcoin and then donate, you pay 30% or more tax first and then less. Also, your depreciation would also be less as the donation is less. Also, since the nonprofits are 501c3, they don’t have to pay tax on the gifts and are better off too.
For those of you who want to go a step further, there is also a tax arbitrage option as there is no laundering rule for crypto donations. This will only help you if you already donate Fiat but value Bitcoin as a HODLing. You may have to read this next paragraph several times as this is a little more complex.
For example, let’s say you are already donating $ 10,000 a year to your favorite charity using your credit card. If you replace this donation of US $ 10,000 with a corresponding Bitcoin donation and use the fiat to buy back your Bitcoin position, you have now cleared your capital gains from the previous positions and increased your cost base. So if you give the same gift in bitcoin every year and then buy back the same amount with the fiat that you would have donated, you are much better off.
Unfortunately, most bitcoiners don’t know about the tax benefits of a donated bitcoin donation. However, if you ask your financial advisor or accountant, you will likely be asked to donate your most cherished assets (like bitcoin) first. Until recently, stock donations weren’t easy, so this was usually a strategy reserved for the mega-rich. As Bitcoin is easier to transfer and hundreds of nonprofits accept Bitcoin donations directly, it is becoming more and more common for the average person to be more tax efficient in helping their cause by donating Bitcoin.
To raise awareness and encourage Bitcoin donations, The Giving Block has launched a tax season campaign aimed at educating users about the tax benefits of donating treasured Bitcoin. While I’m biased towards making a donation, there are a handful of ways you can lower your Bitcoin taxes beyond making a donation. Other methods include
- Use tax software to automate tracking of your transactions
- Work with tax professionals to do the heavy lifting for you
- Moving to a city like Miami in a state with no personal income tax (and a bitcoin-friendly mayor!)
Whether you’re moving to Miami to get a tan and save on taxes, or donating Bitcoin to a charity, we hope you will take the time to plan ahead or consult a tax professional about your HODL plan optimize so you can stack as many sats as possible.
This article does not contain tax advice or financial advice. All parties should do their own research when making financial decisions.
This is a guest post by Alex Wilson. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.