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Donating from your digital wallet

| Dec 23, 2022 | Charitable Donations, Cryptocurrency, Tax Planning

We are only days away from the new year which means I’m here to remind you once again about charitable giving and its potential associated financial benefits. It was just over one year ago that I discussed the benefits of donating appreciated stocks to charities. Recently, I discovered that similar to stocks, you can donate cryptocurrency to charity.

The benefit of donating cryptocurrency is like the benefit you receive if you donate stock directly to a charity: the avoidance of paying capital gains tax.

In other words, by donating cryptocurrency directly to a charity you can avoid paying capital gains taxes on the cryptocurrency while claiming the full amount donated as a charitable deduction on your taxes. If you don’t recall from my prior column, capital gains is the difference between the purchase price of a stock or cryptocurrency and the selling price. The amount of capital gain taxes you pay is dependent on two things: the length of time you’ve owned the cryptocurrency and your total annual income.

However, if you donate cryptocurrency directly to the charity, instead of selling it first, you can avoid paying capital gains taxes on the donation, just like donations of appreciated securities.

In addition to avoiding capital gains taxes through donation, you may also have the ability to claim a charitable deduction. To do so, you must have held the cryptocurrency for at least a year and you must itemize your deductions. Donations worth more than $5,000 must get a qualified appraisal. The charitable deduction is limited to 30% of income, but excess deductions may be carried forward for up to five years. Donations of cryptocurrency are not eligible for the above-the-line charitable deduction, since the above-the-line deduction is limited to cash donations.

Donating cryptocurrency can, however, be a little more complicated than donating securities since the vast majority of charities do not have a digital wallet, and therefore do not have the ability to accept direct donations. However, entities such as Crypto for Charity, Schwab Charitable and Fidelity Charitable are attempting to make the cryptocurrency donation process easier.

How does it work?

Per the Crypto for Charity website, your cryptocurrency donation is first funneled through Crypto for Charity’s affiliated 501(c)(3) tax-exempt charity. From there, the donation is converted to dollars with the net proceeds being distributed to the qualifying charity of your choosing.

If you’re interested in donating cryptocurrency this year or in the future, make sure you research the organization prior to your commitment. Further, given the tax ramifications associated with cryptocurrency donation, it is best to discuss your potential donation with an accountant prior to moving forward.

This article originally appeared as a column for the Cleveland Jewish News.