Cryptocurrencies such as bitcoin and ethereum have become very popular in recent years. Bitcoin, the world’s most popular cryptocurrency, soared beyond $69,000 for the first time in November, after plunging below $30,000 earlier in the summer.
Donating cryptocurrencies is intriguing because it allows contributors to avoid paying capital gains tax. If donors convert the virtual currency to cash before giving it away, they will be liable to the tax, which means less money will go to their chosen charity. A tax deduction is also an added benefit.
Crypto Giving Tuesday, a campaign created by The Giving Block, a crypto donation and fundraising platform for NGOs and individuals, had a 583% increase in digital asset donations in 2021 compared to 2020.
According to the corporation, the Washington, D.C.-based company handled $2.4 million in presents on Crypto Giving Tuesday 2021, with an average donation of $12,600, and giving has continued into the holiday season.
How to Donate Crypto?
Theย Pineapple Fundย was founded in December 2017 by an anonymous crypto investor dubbed “Pine” as “an experiment in philanthropy with bitcoin.” Pine distributed $55 million in bitcoin to 60 charitable groups, ranging from environmental and mental health to social justice and homelessness.
Individuals and organizations are increasingly choosing to donate to charities using cryptocurrency.
- Get yourself a digital wallet which you’ll need somewhere to keep your cryptocurrency funds. A wallet has a public key, a private key, and an address (an alphanumeric string you may share with others, so they know where to transfer the money).
- Donations should be reviewed. Select the criteria you’ll use to decide whether or not to accept donations. Because bitcoin donations are anonymous, learning about the donor’s past may be difficult. Build a form that requires specific fields to be completed with a bit of technical elbow grease, and make sure those areas capture information vital to your organization.
- To make a cryptocurrency donation, first choose Bitcoin, Ethereum, or another cryptocurrency from the dropdown menu, then enter your donation amount in the cryptocurrency of your choice or USD.
- A dynamic wallet address will be established for your donation that is linked directly to the charity’s wallet.
- Making a crypto donation is one of the simplest ways for a blockchain or cryptocurrency corporation/individual to show the world their dedication to corporate social responsibility and principles.
Cryptocurrency’s Benefits in Philanthropy:
Tax Efficiency Optimisation-
- In the views of the IRS, cryptocurrency is property, which means it may be liable to capital gains taxes if sold or traded for a profit, and the period of possession may influence rates.
- If you keep digital money for more than a year, you may be eligible for long-term capital gains tax rates of 0%, 15%, or 20%, depending on your taxable income.
- Donors of cryptocurrency in the United States do not have to pay capital gains taxes on gifts to 501(c)3 organizations that would otherwise be taxable. This is very similar to donating appreciated stocks to a charitable organization in taxation.
- Compare this to the alternative of selling bitcoin and donating the after-tax proceeds, which would be subject to a 23.8% t federal long-term capital gains tax (and even more at a state level, depending on where you live). To put it in another way, this avoidable tax would reduce the value of a $500,000 donation by nearly $119,000.
Increasing Transparency-
Since cryptocurrency is based on blockchain technology, donations may be tracked at any time. If requested, they can be made anonymously so that charities do not obtain the donor’s personal information. The blockchain is a public database of transactions that allows all changes to be traced; items on the blockchain cannot be changed once they have been recorded. As a result, donors may track their contributions over a series of transactions, assuring complete transparency, and they are protected from data tampering or fraud.
Crypto Donations can Increase in Value and Impact-
Crypto contributions have significant benefits above typical monetary donations in increasing their value and impact. Crypto investors may be able to donate bitcoin to a charity of their choice.
While most charities choose to auto-convert to a local government-issued currency, a growing number of charities are opting to HODL cryptocurrency endowments(HODL stands for “hold on for dear life,” a term used by cryptocurrency investors).
This type of donation can increase in monetary value far beyond its initial value over time. Non-profits can set themselves up for long-term success by accepting donations in the form of crypto investments.
When is the Optimum Time to Make a Cryptocurrency Donation?
Don’t donate cryptocurrency that you’ve had for less than a year, according to Oommen.
“While this is not specific to cryptocurrency, many crypto investors have had significant short-term gains and might think about donating crypto held less than a year,” Oommen explained.
“The problem is that the asset must have been retained for a long time for the donor to claim a charitable tax deduction for the full fair market value.” As a result, donations of appreciated short-term assets are limited to a deduction value “at cost basis” โ that is, the asset’s original value before it has increased in value.
There’s also a question of timing to consider when it comes to cryptocurrency volatility. Although cryptocurrency trades 24 hours a day, the non-profit receiving the donation can only sell the cryptocurrency during business hours.
Crypto Wash Sale Loophole
Virtual currencies like Bitcoin, Ethereum, Dogecoin, and even Shiba Inu are classified as property by the IRS. This means that crypto investors areas subject to capital gains and losses taxes as traditional investors, with one key exception. They get around one rule that only applies to financial assets: the “wash sale” requirement.
- Experts warn that while cryptocurrencies with built-in returns may be enticing to give, you should modify your plan if you’re in a losing position.
- If cryptocurrency is down, it might be a better idea to contribute other successful assets that have been kept for longer than a year.
- Someone might sell digital currency at a loss to offset other gains, then repurchase the asset to keep exposure and transfer another appreciated investment.
- Even though House Democrats hoped to eliminate the crypto wash sale loophole by December 31, Sen. Joe Manchin, D-W.Va., has announced he will not support Build Back Better, thereby blocking the present version of the funding bill.
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The Future of Cryptocurrency for Social Good
Cryptocurrency’s growing popularity and adoption among investors may be excellent news for charitable donations. Cryptocurrency owners, like Bitcoin or Ethereum, are disproportionately more philanthropic, according to a survey by Fidelity Charitable. For example, in 2020, 45% of bitcoin investors, compared to 33% of the whole investor population, donated $1,000 or more to charity.
Whether you want to support clean water, early childhood education, or human rights campaigns, dozens of organizations are already set up to accept cryptocurrency payments.
In May, Ethereum co-founder Vitalik Buterin donated $1 billion worth of Shiba Inu currency โ often known as a “meme” or joke coin โ to the India COVID-Relief Fund, bringing the token’s price down by 50%.
Only $20 million had been used two months later, according to Sandeep Nailwal, the aid group’s founder, due to difficulties with both converting the cryptocurrency and complying with Indian government regulations regarding the assets. (The price of a Shiba Inu has since risen dramatically.)
Pete Howson, a cryptocurrency researcher at the University of Northumbria in England, believes that the usage of virtual currencies could increase “surveillance philanthropy” in some circumstances. For example, GiveTrack, a cryptocurrency crowdfunding website, sends donors updates on how their coin contributions were spent using blockchain technology and material from charities.
Crypto Giving Tuesday, The Giving Block’s biggest fundraising event of the year, took place on November 30 and shattered last year’s event by raising $2.4 million in just 24 hours โ a 538% increase over the one-day event last year.
Ari Paul, co-founder and CIO of BlockTower Capital revealed that he would consider donating crypto to charity by putting half of all he owns into a charitable trust by the end of the year.
Ari believes that donating bitcoin to charity is preferable to selling it and donating cash from a tax standpoint.
The majority of non-profits sell cryptocurrencies as soon as they receive them. However, some crypto evangelists would feel better about their donation if they knew the charity would keep the cryptocurrency either as an investment or a tool to help the charity deliver its services, such as for projects overseas. If the donor is concerned about this, they should contact the organization before donating.
“Obviously, people in cryptocurrencies believe in its ability to create change,” said Connelly. However, donors who want non-profits to keep their bitcoin donations should check whether the organization “is really on board with cryptocurrency and the change it may bring, rather than just seeing it as another asset they might accept to perform their work,” she added.