Donating from your digital wallet

By Andrew Zashin*

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.

2023-11-10T13:38:04-05:00December 23rd, 2022|Charitable Donations, Cryptocurrency, Tax Planning|

Good recordkeeping can avoid cryptocurrency tax headaches

By Andrew Zashin*

Bitcoin and other virtual currencies continue to make headlines as they are used more and more frequently. Although it remains a favorite currency for illegal sales of drugs and weapons, and for other other “shadowy” transactions accomplished on the dark web, they have became a legitimate method of payment in many above-board transactions, not to mention an investment vehicle. It is, thus, unsurprising that the government has been paying close attention to the ramifications.

Back in 2014, the IRS issued Notice 2014-21 to clarify the treatment of cryptocurrency for federal tax purposes. Note, it is generally treated as property and can be subject to capital gains/losses, but it may also be reportable income if it is received as payment for goods and services. Both before and since, the IRS and other governmental agencies have been focused on the regulation – and the taxability – of cryptocurrency and related transaction.

For it’s part, the IRS has started more than 30 campaigns since 2017 that are intended to educate the public and to ensure compliance. Among compliance efforts, in 2016 the Internal Revenue Service subpoenaed Coinbase, one of the largest exchanges for Bitcoin and Ethereum cryptocurrencies, for the identities, account information and transaction histories for all users. After a court battle and Congressional involvement, the broad subpoena was limited in scope to a small sliver of time and to transactions of $20,000 or more. The identities of average users were spared for the time being, but the message was clear. The IRS is watching these transactions and cryptocurrency users had better comply with the tax laws.

Most recently, the IRS has begun sending letters to thousands of cryptocurrency users it’s identified, reminding them of their obligation to properly report – and pay – taxes on their cryptocurrency holdings and transactions. By the end of this month, more than 10,000 users are expected to receive such letters. While different situations will prompt different versions of the letter – there are purported to be three in total – all are focused on education about filing and tax obligations, as well as where to go to find more information.

Per IRS Commissioner Chuck Rettig, “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties.” Commissioner Rettig went on to state that the IRS “is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

At the same time, Blox, a platform for crypto accounting, management and tracking, just released one of the first and most in-depth reports on the state of crypto accounting. Among its findings are that on a small number – perhaps as low as 5% – of certified public accountants believe their individual and business clients are able to accurately track and report their virtual assets and transactions for purposes of proper accounting and taxing. Reasons for improper reporting were chalked up to a lack of understanding of crypto tax rules, and a need for more government regulation and guidance to help clients remain in compliance.

All of this leaves a burgeoning business for crypto accountants, as cryptocurrency users try to stay above the law. For users, the first step is going to be good recordkeeping.

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

2023-11-10T13:38:10-05:00August 19th, 2019|Bitcoin, Cryptocurrency|

Cryptocurrency investing not for the faint of heart

By Andrew Zashin*

Once limited to techie news, cryptocurrency has now hit the finance pages and even mainstream media. Bitcoin, one of the predominant players, was trading at around $1,000 in January 2017. The subsequent months saw enormous jumps, with the value per Bitcoin nearing $20,000. With those sorts of gains, it is no wonder that many have wondered how they, too, could get in the game.

“Cryptocurrency” refers to a subset of digital or virtual currency (and its moniker refers to the cryptography used to create it and transact with it). Unlike traditional money it is not backed by any government. The holder does not have a coin or a bill.

Instead, it is an entirely digital asset. It is created, or “mined,” under controlled conditions, although admittedly the identity of the governing body is sometimes a bit nebulous. It is traded on specialized exchanges created for that purpose. Like other securities, cryptocurrency can be bought and sold. Like traditional government-backed currency, it can be used to purchase goods and services, assuming, of course, the seller accepts it as valid tender.

Bitcoin is not the only player in town, but it has been covered the most widely in the mainstream news given the huge swings in value. Nowadays, it is still up significantly from this time a year ago, but most recently it dropped down below the $10,000 mark as investors dumped it amid concerns about increased scrutiny and regulation. The volatility is enough to give anyone whiplash.

The chairman of the U.S. Securities and Exchange Commission in December released a statement on cryptocurrencies and initial coin offerings, pointing to specific concerns with this market. Warren Buffet has called it “a mirage” and has said the current frenzy surrounding it will “end bad.”

One of the primary risks with this type of investment is the sheer lack of governmental oversight and regulation. Of course, most types of investment come with some risk. But cryptocurrency markets cross national borders and trading may occur on a system anywhere in the world. Invested funds are very likely to leave the United States without your knowledge.

Regulatory agencies such as the SEC may not be able to offer any adequate remedy. The rules may be different wherever the funds end up; South Korea and China, for example, appear to be working toward regulation in their respective nations. Or the body that might otherwise regulate it – the SEC, for example – might not have jurisdiction at all. The definition of the “thing” being traded is in flux, with many arguing that cryptocurrencies are not securities, and that the trading of them is not within the SEC’s jurisdiction at all.

Surely, some have become significantly wealthier for having invested in cryptocurrency. However, it is definitely riskier than your average investment. In this area, the law is continuously evolving and trying to catch up. If you are thinking of jumping on the bandwagon, it has never been more important to do your research to decide for yourself if cryptocurrency is a reasonable investment.

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

2023-11-10T13:38:12-05:00January 18th, 2018|Bitcoin, Cryptocurrency, Investing|
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