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Tax Benefits of Cryptocurrency Donations | Insider Guide

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Published October 27, 2021 Reading Time: 5 minutes

Avoid capital gains on cryptocurrency.

Many believe that cryptocurrency is less regulated than other currencies and thus might allow people to avoid paying taxes. It’s important to know that the IRS actually considers cryptocurrency a capital asset for federal income tax purposes.

Come tax season, you’re on the hook for paying taxes for cryptocurrency gains in the same way you would for any other capital asset.

Fortunately, there are relatively simple ways to leverage cryptocurrency to reduce your taxes in April by making charitable contributions. Here’s how.

The suggestions in this article are general best practices and may not work for everyone. Always consult your tax advisor to determine the best course of action for your particular financial situation.

Filing and Reporting Crypto Donation Taxes

In general, the amount you owe in crypto taxes is determined by the capital gains or losses in a given period. The capital gain or loss you’d report on your tax return is the difference of the amount you earned on the sale of the crypto and your cost basis (the amount you spent to acquire it).

You also need to consider the amount of time you’ve owned your crypto.

  • Short-term gain or loss: Occurs if you bought and sold your unit of Bitcoin within 365 days
  • Long-term gain or loss: Occurs if you sold your unit of Bitcoin after one year

Each type of capital gain or loss results in various different tax rates (typically 10 to 37 percent for short-term, and 0to 20 percent% for long-term), depending on your overall taxable income.

How Crypto Gains Are Treated During Tax Season

Many people have started to consider leveraging cryptocurrency to pay for products and services. This is especially true as crypto adoption increases and more companies begin to accept it as a form of payment. However, using crypto to pay for a product could result in capital gains tax.

Every time you convert Bitcoin to cash, it is technically a taxable event. Going explicitly by the tax code, if someone has a gain on their cryptocurrency and uses it to pay for a product, they would have to pay capital gains taxes similarly to other investment vehicles.

Daniel Polotsky

CEO of CoinFlip, a Bitcoin ATM operator

Put it in perspective: Let’s say you bought Bitcoin for $10,000, and it has since climbed in value to $100,000. If you used this to purchase a home—or even a $5 cup of coffee—you could be liable for $90,000 in capital gains tax.

How Crypto Losses Are Treated

If your cryptocurrency loses value in a given period of time, you’d experience a capital loss. You can offset capital gains with capital losses, which would allow you to deduct income from your tax return. But there are rules and limitations to this procedure.

  1. You must first apply only short-term losses to reduce short-term gains. In the same vein, you must only apply long-term losses to reduce long-term gains.
  2.  If you have any more losses afterward, they can then apply to the opposite type of gain.
  3. After that, you can use any remaining capital losses to offset up to $3,000 of your taxable income.

It sounds complex, but the results are worth it.

Avoiding Taxes on Crypto With Donations

The current accounting and tax implications of using crypto can clearly be quite grim, but there are a few ways to lower your taxes on crypto. The first major way is to donate crypto to your favorite nonprofits.

Donate Your Crypto to Charity

Making your donations with crypto allows you to not only make a positive impact on the world but also save on taxes and money while doing so.

Donating crypto directly to a nonprofit is not a taxable event. This means you won’t have to pay any capital gains tax when you file. And, like any other donation, this type of donation would also be tax-deductible.

If you donate a long-term appreciated asset (bought and sold after a year), you can deduct the fair market value of the crypto at the time of your contribution. This means you can deduct this asset at its appreciated value. If you bought your crypto for $10 and it’s since appreciated to $20, you can deduct the $20 value.

It’s an overall win-win situation.

Alternatively, if you converted your crypto into cash and donated it to a nonprofit, you would pay the capital gains tax.

Look Into Tax-Loss Harvesting With Crypto

Another way savvy investors try to save by avoiding taxes is through tax-loss harvesting. Because wash sale rules currently don’t apply to crypto, you can sell your crypto token at a loss and buy it back immediately at a better price, rather than having to wait 30 days as you must with stock. People can accumulate many of these losses to help offset future gains.

It’s important to note, however, that you need to meticulously track all of your activity to validate your claims to the IRS. Also keep in mind that tax-loss harvesting helps you defer and lessen your crypto taxes, not permanently avoid them.

The same offsetting rules also apply with these losses, where you must first only apply short-term capital losses to short-term capital gains, and long-term capital losses to long-term capital gains, and so on.

Lower Your Taxable Income

You can also minimize your taxes by lowering your overall taxable income. Short-term capital gains are subject to the same tax rates you pay on ordinary income, and long-term capital gains vary depending on your income.

You can lower your taxable income by investigating all the tax deductions and credits you can qualify for. Whether you contribute to a retirement savings plan, scour the various tax credits that could apply to your unique situation, or ask a tax professional to help you dig up other tax breaks, you can see the results come tax season. This approach is straightforward but requires much research.

Example Crypto Donation Tax Scenario

To illustrate the tax efficiency of donating crypto, let’s say:

You bought crypto for $2,000, and it appreciates in value to $20,000. 

Option A:

  • You donate $10,000 of your crypto directly to a nonprofit, you write off the full $10,000, and the nonprofit receives $10,000.

Option B:

  • You sell $10,000 of your crypto first to donate in fiat currency, you get taxed at a rate of 24% (as an individual making a 2021 annual income between $86,376 to $164,925), and are liable for $2,400 in taxes. In this case, your write-off, and the amount the nonprofit receives, is $7,600.

The winning scenario is clear. Lower your taxes and give more by donating your crypto directly to nonprofits, rather than making a cash donation.

Common Crypto Donation Tax Questions

Why are crypto taxes so high?

Like stocks, the IRS considers cryptocurrency as “property” for tax purposes, treating it as a capital asset. You are taxed on your cryptocurrency gains the same way you’d be taxed for gains on your capital assets.

Are crypto taxes on Robinhood treated differently?

The crypto transactions you make on Robinhood stay within the platform and don’t go into your crypto wallet. In order to move your crypto assets to another platform, you’ll have to sell and then repurchase your crypto, which means you’ll incur taxes on any capital gains you may have had.

How are crypto trades taxed?

Many of the same tax rules that apply to stock trading apply to crypto. You owe capital gains taxes on any profits earned while trading crypto. If you lose money, you can write off the trade as a capital loss.

When do I pay taxes on my crypto?

You pay taxes on your crypto when you dispose of it, such as when you sell, trade, or use it as payment. If you received cryptocurrency as income—such as through mining, or getting paid in crypto by your employer—you could also pay taxes on that cryptocurrency.

Are there any special forms I should submit for crypto taxes?

Fill out the IRS Form 8949 to report your cryptocurrency taxes, and include those totals on your Form Schedule D. Report any remaining crypto income on the Form 1040.

As always, consult your tax professional to identify what is best for your personal needs. But with these tax implications of crypto, consider how you can use your crypto for good while also minimizing your taxes.

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