According to a study by Fidelity, nearly half (45%) of all cryptocurrency investors donated $1000 or more to charities. It’s huge compared to the total investor population donating to charities, only 33%. We don’t know why crypto investors are more inclined towards charities than the overall investor population. Maybe they are just good people. Or maybe because crypto donations are very beneficial when it comes to taxes. Not saying that it’s the only reason, but it could be a factor.
Nonetheless, the fact remains that crypto donations are advantageous for taxes since it’s tax-deductible. In this article, you’ll learn how taxes on crypto donations work, how taxes on donating NFTs work and the right way to donate crypto to save the most taxes.
But before that, let’s quickly go over the basics of how crypto gains and losses are treated during the tax season.
Basics of How Cryptocurrencies are Taxed
The IRS treats crypto as property. Therefore, taxes on crypto are the same as any other property or assets (e.g., stocks).
If you hold your crypto for more than a year before selling it for a price higher than its cost basis, you realize long-term capital gains. Tax rates for long-term capital gains range from 0-20%.
If you hold your crypto for less than a year before selling it for a price higher than its cost basis, you realize short-term capital gains. Tax rates for short-term capital gains range from 10-37%.
In both scenarios, if you sell your crypto for a price less than its cost basis, you realize capital losses, which you can use to offset your other capital gains.
To know more about crypto taxes in-depth, click here.
Taxes on Crypto Donations
Donating cryptocurrency is completely tax-free. As per the IRS, donating or gifting cryptocurrency is not a taxable event. But that’s not all. Donating crypto is not only tax-free but also tax-deductible, meaning you can use the donated amount to reduce your total taxable income.
If you have cryptocurrency sitting at an appreciated value, you can donate it and itemize charitable deductions for its fair market value. The only caveat – if you donate crypto held for less than a year, you can only deduct its cost basis. But looking at the bright side, you’ll still avoid paying short-term capital gains.
However, donating crypto held for more than a year still remains the better option. Not only can you avoid paying capital gains taxes, assuming your crypto has appreciated in value, but you’ll also deduct its fair market value from your total taxable income.
Example of Crypto Donation Tax Scenario
Suppose you bought 0.5 BTC for $1000 in 2018, and now, its value is $2000. If you sell it, trade it, or use it to buy a product or service, you’ll realize a capital gain of $1000.
Instead, what you can do is donate that 0.5 BTC to a qualified charitable organization. By doing this, not only can you avoid paying capital gains taxes on the $1000, but also deduct its fair market value, which is $2000, from your total taxable income. So, if your total income is $8000, you’ll only pay taxes on $6000.
So now, you can give back to society by donating crypto to your choice of charity and reducing your taxes in the process – a win-win situation for all.
However, make sure you only donate to qualified charitable organizations recognized by the IRS. To find that out, you can use this free resource provided by the IRS.
Taxes on Donating NFTs
Taxes on donating NFTs are not as simple and straightforward as taxes on donating crypto.
Well, because, unlike a particular cryptocurrency, there is no fair market value of an NFT. An NFT’s fair market value is decided by how much someone is willing to pay for it. Hence, taxes on donating NFTs can get tricky since we don’t know how exactly the IRS interprets it.
But there are a couple of ways to work around it.
The first one is not that good of an idea. All you do is auction your NFT and donate the price you sell it for. But as you can tell, you’ll not save any taxes this way. Alternatively, if you can find a way to set up an auction and find out the highest price someone’s willing to bid but not actually sell it, you can get an estimated price for the NFT.
Or you can hire an NFT expert who can evaluate your NFT and give you a fair and ideal price for it. You can then donate that NFT and deduct that amount from your total taxable income. However, keep in mind that there is a risk of getting audited associated with this method. We recommend you speak with your tax professional regarding this.
Other Ways to Save Taxes
Apart from donating crypto, there are other methods you, as a taxpayer can use to reduce taxes. The following are some ways you can save more taxes.
Tax Loss Harvesting – Tax-loss harvesting refers to deliberately selling your cryptos for a loss to offset gains. Read our guide to tax loss harvesting to know more about this.
Wash Sale – Basically, tax-loss harvesting with the addition of quickly buying back the cryptos that you sold for a loss. It’s a loophole only available in crypto. Read more about it here.
Show More Expense – You can lower your total taxable income by showing more business expenses. Of course, you can’t lie about it. But if you look around, you may find some expenses that you can deduct from your taxable income. We recommend you consult with a tax professional.
As we said before, donating crypto is a win-win situation for all. You get to save more taxes while giving back to society. However, it’s important you track your crypto transactions to choose and donate the ones that will be the most beneficial for you.
Bitcoin.Tax is the best crypto tax software out there in the market. It helps you import all your transactions from every wallet and exchange you have and calculates your taxes while you sit back and relax.