Even in a bear market, there are opportunities to legally avoid paying capital gains and lower your tax liabilities. One of those opportunities is to donate appreciated assets. There are organizations like Endaoment, a community foundation that allows you to donate digital assets and receive a tax receipt while they convert the assets into fiat for any 501(c)(3) nonprofit organization.
Overview of Digital Asset Taxability
Before diving into the tax savings related to a donation, it’s essential to understand some accounting basics. Cost basis is the original price when you acquired the digital asset. You need cost basis and proceeds (cash or value received from the sale) to calculate your capital gain or loss.
Capital Gain/Loss = Total Proceeds – Cost Basis
Since the US treats cryptocurrency as property, you pay tax on your net capital gain or loss.
Donating crypto directly to a charity is more tax advantageous than donating cash proceeds after selling your crypto. When you donate cryptocurrency directly to a charity, the tax code allows you to bypass the underlying capital gains taxes. In addition, if you itemize your deductions, you can claim a tax deduction when you donate digital assets to qualified charitable organizations. If the assets are held for more than one year (long term), the deduction is typically equal to the fair market value of your cryptocurrency at the time of charitable contribution, and you don’t have to pay capital gains taxes. If the asset is held for less than one year (short term), the deduction is equal to your cost basis. Here is an example of the potential tax savings from donating appreciated assets.
IRS Form 8283
If you’ve donated more than $500 of cryptocurrency to a charity during the tax year, there are additional filing requirements to be aware of. You must complete Form 8283 and include it with your tax return. If you’ve donated more than $5,000 of cryptocurrency and would like to claim a deduction, you’ll need an appraisal by a qualified appraiser (even if the value is readily available from an exchange). The IRS confirmed this requirement on January 13, 2023, with CCA 202302012. This CCA also states that the reasonable cause exception does not apply to cryptocurrencies. That means if you did not obtain a qualified appraisal, you can’t claim the deduction, and if you did, it would be disallowed if examined. The appraiser will need to sign Part IV of Form 8283, which is attached to your return. Typically the appraisal doesn’t need to be attached to the return.
NFT donations are still new and particularly tricky from a tax perspective, in addition to always requiring an appraisal regardless of the desired deduction amount. We typically see two types of NFT donations: artists looking to split NFT proceeds as NFTs are minted and holders looking to donate NFTs from their wallet(s).
For creators minting NFTs, there are two options for handling the assets received:
A) They can send the assets to their wallet or the mint contract and then donate the NFT or proceeds. In this case, the creator may need to pay taxes on the income and claim a deduction for the donated amount.
B) They can send the assets directly to a 501(c)(3) organization like Endaoment. If they choose this option, since the artist never recognized the income, doesn’t owe taxes, and doesn’t claim a charitable deduction. However, if the charity auctions the NFT(s) at a charity auction, the purchaser may be able to claim a deduction.
For NFT mints, it's generally more tax-efficient for the creator to allocate a portion of the proceeds directly to a nonprofit like Endaoment at the contract level. If the creator receives assets and then donates them, it may create tax liability and result in a less favorable situation. In the best case, it would have the same tax benefit as splitting the assets at the contract level but with additional steps and reporting requirements.
For NFT holders looking to donate NFTs they hold in their wallets, the deduction is determined by how long they've kept the NFT:
- If held for over one year, the deduction equals the fair market value.
- If held for under one year, the deduction equals the cost basis or the fair market value, whichever is smaller.
Regardless of the donation method, an appraisal is required. If the NFT is donated and then immediately auctioned by the charity, the auction price informs the appraiser but is not sufficient on its own.
If you have any questions or comments about crypto taxes, let us know on Twitter @CoinTracker.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.