Last month, the United States Congress increased the tax benefits of charitable giving in the CARES Act in hopes that people will give more. Some give money; others give property; and a growing number have been giving crypto assets.
Once you have made the difficult decision of which charity or cause to donate to, your focus should shift toward your tax position. There are certain things to keep in mind when giving crypto assets — particularly considering how their volatility can affect your taxes and decision making.
Which crypto asset do I gift?
Generally, giving a gift of crypto does not trigger a taxable event to the donors or to the recipients. Thus, after donors decide how much they wish to give, they must also decide which assets to give. Donating assets with a low tax basis can reduce or minimize future taxable income, as the donor retains assets with a higher tax basis. Entities that are exempt from U.S. tax due to their educational, charitable or other activities (“charity”) are often indifferent toward the tax basis of the assets they receive. This is because they are normally exempt from taxes on gains from assets sold to fund their charitable activities.
If the recipient of the gift is not exempt from U.S. tax — i.e., a “non-charity” — they will likely care about the tax basis of the asset given to them. This is because the donor’s tax basis on gifted assets often — but not always — transfers to the non-Charity. Thus, if the donor wishes to prioritize their own tax position over the non-charity’s, the donor will give crypto with the lowest tax basis. Conversely, if the donor wishes to prioritize the benefits of the gift to the non-Charity, they will give crypto with the highest tax basis.
Does my crypto gift have a built-in loss?
Crypto assets have a built-in loss because their tax basis is higher than their current market value; therefore, a donor may wish to sell the crypto for cash (to realize a capital loss) and then give that cash to a charity or non-charity. The donor can use this capital loss to offset tax on any capital gains they may have while transferring the same value to the charity or non-charity.
If a donor gives a gift of crypto with a built-in loss to a non-charity, the potential tax deduction from the built-in loss is lost. This is because the general rule that transfers the donor’s tax basis to the gift recipient does not apply in the case of built-in-loss assets that a gift recipient sells for a loss. Rather, the tax basis of the property sold by the gift recipient is limited to the fair market value of the assets at the time of the gift.
Will I receive a charitable deduction?
Individuals who itemize deductions may be entitled to a deduction for gifts of crypto they make to certain charities. Entitlement to the deduction is given when an individual’s itemized deductions exceed their standard deduction — i.e., $12,400 for single taxpayers and $24,800 for married taxpayers. However, even if an…