Donate Crypto for a Tax Break
If you're wondering how to avoid taxes from selling crypto that's appreciated significantly, one answer might be in a donor-advised fund.
Despite a bumpy ride, many bitcoin investors are sitting on big gains, with the cryptocurrency reaching new highs in 2021. One way to avoid the tax bite that comes with selling appreciated crypto is to direct it to charity instead, and investors are taking notice. In 2021 through September, donors contributed $158 million in crypto to Fidelity Charitable donor-advised funds, a 464% increase from the same period in 2020.
With a donor-advised fund, you can contribute assets at any time and decide later what charities to support with grants from the fund. Contributions are eligible for an immediate charitable tax deduction for those who itemize and grow tax-free in an investment account. And when you donate appreciated assets (such as stocks or crypto) that you’ve held for more than a year, you avoid long-term capital gains tax of up to 20% (see Your Guide to Giving). If you want to contribute to a charity that doesn’t accept crypto, funneling your donation through a donor-advised fund that takes crypto can bypass that obstacle.
The largest donor-advised funds accept donations of cryptocurrency, and others are expected to follow suit as the investment’s popularity grows. Fidelity Charitable has no minimum asset contribution for its donor-advised funds, to which donors can add crypto at any time. Schwab Charitable (no minimum for a self-managed account; $250,000 minimum for an account managed by an investment adviser) takes crypto contributions on a case-by-case basis. Vanguard Charitable ($25,000 minimum to open an account) accepts bitcoin from existing donors on a case-by-case basis.
Donations of appreciated crypto investments that you’ve held for more than a year, which qualify for a tax deduction of their fair market value, make the most financial sense. If you’ve held an appreciated cryptocurrency as an investment for a year or less, your tax deduction is limited to the cost basis—essentially, the original amount you paid. “It would be the same net effect, tax-wise, as selling it yourself and donating the proceeds,” says Tony Oommen, of Fidelity Charitable. And because cryptocurrency is considered property, donations of more than $5,000 in value require a qualified appraisal—which may run a few hundred dollars—to claim the tax deduction, says Oommen. Ask your tax adviser to recommend an appraiser, or use a service such as Charitable Solutions.