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Deduction on Cryptocurrency Donations

By March 7, 2023June 1st, 2023Crypto
Cryptocurrency Donations

In this modern day and age, several charitable institutions accept cryptocurrency donations. This makes it easier for a lot of people to utilize their virtual currency. The big question is if there is a tax deduction benefit on cryptocurrency donations.

Whenever someone donates to a charity, it is usually considered a tax benefit. Essentially donating cryptocurrency is one of the smartest ways to lower your taxes. But there’s more to it than writing it off. 

What is Cryptocurrency?

Cryptocurrency is defined as a digital currency that is designed to work as a medium of exchange through a network that is not reliant on any central authority. It is an alternative form of payment created using encryption technology. This basically means that cryptocurrencies function both as currency and a virtual accounting system.

Satoshi Nakamoto is the name used by the person who developed Bitcoin. The real identity of Nakamoto is still not publicly known, however, there are speculations that Dorian Nakamoto is the said creator.

Can You Write Off Cryptocurrency Donations?

Whenever someone donates to charity it is considered a tax benefit. A lot of people like to donate property and items instead of direct cash when it comes to it, and the same goes for cryptocurrency.

Let’s use a real-life example from a recent tax court case. There was a woman who recently donated a large sum of cryptocurrency to charity. She tried to write it off for her tax return, but the IRS said she was not allowed to.

But the question is, why was she not able to? When you donate property with a value of $5,000 or more you have to get an appraisal first. While there are exchanges that tell you the exact dollar value of the cryptocurrency used, but since the IRS classifies all cryptocurrencies as property and not security, you would need to have an appraisal done regardless of these exchanges listing value. Without it, the IRS will completely negate and take away your deduction for charitable contributions.

In this particular scenario, the woman did not have her Crypto appraised and she thought she could just go to the exchange and check the price there.

Are There Exceptions to the Rules Regarding Cryptocurrency Donations?

The IRS does have exceptions to the rules for writing off donations, at the moment with cryptocurrency. Some don’t need to have their donations appraised before having them written off if the value is below $5,000. The exception relates to anything that readily has value. This applies to specific types of property which include; publicly traded securities.

However, cryptocurrency is not a security or publicly traded one. It is classified as property. In the scenario mentioned earlier, the woman needed to have the appraisal done because she did not qualify for the exception of having a readily valued property.

Why Should You Donate Cryptocurrency?

If you choose cryptocurrency donations instead of cash, you can enjoy various tax benefits, however, it is typically on recommended if you have a gain on that cryptocurrency. This is because if you donate property cryptocurrency to a charity you get to write off the current value of that cryptocurrency, meaning you do not need to pay taxes on the gain.

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