How to Donate Cryptocurrency

Cryptocurrency, virtual currency secured by cryptography, has been growing in popularity since Bitcoin became part of mainstream discourse. More recently, donating cryptocurrency has become a part of the conversation, propelled by individuals who have seen their wealth grow dramatically due to their crypto investments. In response, some charitable organizations have begun accepting cryptocurrency donations directly. If you are thinking about donating cryptocurrency, you should consider a few things first. 

Should I Donate Cryptocurrency?

If you are already in the crypto game, donating your coins directly to charitable organizations can be a great way to make the most of your gains. However, if you are not already engaged with the crypto market, donating is not a good reason to jump in. 

Since the rise of Bitcoin, countless other cryptocurrencies have popped up, not all of them legitimate. Scam cryptocurrencies like Squid Game have been used to con millions of dollars from crypto holders. Even legitimate currencies pose problems. Cryptocurrencies, unlike U.S. Dollars, are not government-backed and lack legal protections. This means that holders who lose their crypto coins to scams have no recourse to regain their lost money. Additionally, cryptocurrencies are notoriously volatile, which makes them a high-risk investment. While these challenges may be part of the allure for investors who enjoy reading white papers and trying to ‘win’ the market, crypto isn’t for everyone.

If you are already a crypto holder, donating can be a great option for several reasons, but read the fine print first. How long you have held your coins may determine the tax value of donating them. The IRS explains that “Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year. If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution.”

You may need to hold your coins past the year mark to maximize the tax benefits of donating, but you will have to weigh these benefits against possible future price changes. Ultimately, if and when to donate cryptocurrency will be your judgment call.

What Are the Benefits of Donating Cryptocurrency?

Cryptocurrencies lack the legal protection that the USD enjoys, but they are not exempt from legal obligations like taxes. Cryptocurrencies are taxed whenever you make transactions, including when they are sold in exchange for USD or other cryptocurrencies. However, donating crypto to a recognized charitable organization will not count as an income, gain, or loss. This means that donating crypto directly - rather than exchanging crypto for USD before donating it - is the most efficient way to make contributions to charitable organizations.

Cryptocurrency donations, properly recorded, can be counted toward charitable tax deductions, which may be especially valuable to crypto holders who have significant tax burdens due to realized crypto gains. Cryptocurrencies may also present lower transaction fees for charitable organizations, which face processing fees for traditional donations that may exceed the costs of crypto transaction fees. 

What About NFTs? 

Non-fungible tokens (NFTs), like traditional cryptocurrencies, use cryptography to secure digital assets. NFTs usually indicate ownership of digital art - like an image, gif, or audio file. This market is subject to the same challenges as cryptocurrency, and because it is still in its infancy, it is even more volatile. For example, the NFT of the first-ever tweet was purchased for 2.9 million dollars in March of 2021, just a year later it was put up for sale and received a high bid of $280. It remains unclear how NFTs will retain (or fail to retain) value going forward, particularly because NFTs lack any enforcement mechanism that prevents people who don’t own the NFT from using the associated file however they choose.

The good news is that NFTs exist on the same platforms as cryptocurrencies, so donors can give NFTs in the same way as cryptocurrencies to organizations that are set up to accept them. Alternatively, donors may choose to auction off NFTs for charity and donate the proceeds to a charitable organization. When an NFT is exchanged for another NFT, USD, or cryptocurrency the translation is subject to taxes. NFTs are subject to the same charitable donation criteria as cryptocurrencies. 

How Do I Donate Cryptocurrency? 

If you have decided that you want to donate cryptocurrency and that this is the appropriate time, the hard part is over. Many organizations make it quick and easy to donate cryptocurrency.

First, find organizations you want to support that accept crypto. Those organizations may choose to keep the cryptocurrency or, like Charity Navigator, they may immediately sell it and have it transferred to USD. Organizations will make this decision based on their own risk tolerance. 

Once you have chosen an organization, conduct your transfer in the manner they provide. Organizations may choose to limit which currencies they accept. Remember that if you trade the type of crypto you hold for another to make a donation, you will be taxed, and the year-long countdown to receiving the full current market value of the currency in your charitable tax deduction will be reset. If you want to track your donation for tax or other purposes, provide your contact information as directed. If you do not intend to claim your gift on your taxes, you may choose to donate anonymously.

Finally, have all of the necessary documents for your tax purposes. The IRS details how nonprofits can formally acknowledge cryptocurrency donations: “A charitable organization can assist a donor by providing the contemporaneous written acknowledgment that the donor must obtain if claiming a deduction of $250 or more for the virtual currency donation.”

Some donors are entitled to legal recognition of their donations by nonprofits, according to the IRS:  “A charitable organization is generally required to sign the donor’s Form 8283, Noncash Charitable Contributions, acknowledging receipt of charitable deduction property if the donor is claiming a deduction of  more than $5,000 and if the donor presents the Form 8283 to the organization for signature to substantiate the tax deduction.”

Are you ready to jump in and be a part of the cryptocurrency charity trend?