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This is a crosspost from my personal website, but it contains lots of useful technical information on taxes and giving with crypto in the US. It also focuses on giving in EA. Note that in the case that I update this information, it will only be on my personal website. I pasted the contents here for your convenience.
https://www.aaronhamlin.com/articles/your-guide-to-cryptogiving
Aug 31, 2021
Would you like to change the world for the better? If you have a bunch of crypto, then you’re in luck. It’s one of the best ways to give to charity. Stay tuned to learn how to put it to use. This essay goes over how to give cryptocurrency without accidentally hurting your favorite nonprofit or getting a surprise tax bill.
We give to make the world a better place. We live in a world that is wonderful in many ways for a large number of people. But our world creates horrendous suffering for many others. And it could be much better for us all. We want a long future that is a positive experience for everyone born into it.
Fortunately, there are charities whose mission is accomplishing that goal. Most of us can afford to put money towards those goals. Those who have made money in cryptocurrency are uniquely qualified. And some who have made significant money in crypto have an amazing opportunity.
Cryptocurrency is uniquely qualified as one of the most convenient assets to give. That’s because historically many coins have increased drastically in value over the years. And that’s exactly what you want. Assets uniquely fit for giving have (1) gained heavily in value since you purchased it (i.e. significant appreciation) and (2) are held for longer than a year (i.e. a long-term asset).
Why are these qualities so good? Let’s look.
When you think about giving to a charity, typically, you’re thinking about a 501(c)3 public benefit charity. Giving an appreciated long-term asset like cryptocurrency is perfect here. It’s awesome for two big reasons.
First, when you give cryptocurrency, you get to deduct its current value up to 30% of your adjusted gross income when you hold it for over a year. (When you hold it for less than a year, you’re limited to deducting what you bought it for or its fair market value, whichever is less. And technically, if you elect to deduct this lower value for all your long-term assets, then you can deduct up to 50% of your adjusted gross income. See IRS Publication 526 for more.) In any case, depending on your income, that can be quite a tax break.
Secondly, you don’t realize the gains (appreciation) of assets you give to charity. Realized gains are treated as income, so avoiding this means sidestepping a big tax bill. And although gains from a long-term asset can be taxed lower under capital gains, even those taxes can add up when you’re talking about significant sums.
So what are your options after you give the 30% max of your adjusted gross income?
After you max out, you no longer get to take advantage of the full deductions. Now, you can technically get some benefit by carrying over the original purchase cost as the deduction to future years. But that’s not nearly as good because in our case that’s a very different amount from the current value. Still, there’s some upside here because you’re still avoiding the tax on the gains you’d otherwise realize.
Since you’re no longer thinking about the deduction, you can, if you like, continue to give to a 501(c)3. This still works well because you’re still avoiding tax on the appreciation. Of course, you can also give again in future years up to 30% of your adjusted gross income in those years. That spacing, if possible, will make sure you can fully leverage your deduction.
Another option after you’ve maxed out within a year is to give to a social welfare organization, a 501(c)4. These organizations often do lobbying. This may be to get legislators to vote a particular way on bills or to get the public to vote a particular way on ballot initiatives. This is an organization where you wouldn’t be able to get a deduction anyway. But since you’ve maxed out your deduction, you can use your flexibility. By giving to a 501(c)4, you still avoid realizing the gains of the cryptocurrency, which is a great deal.
Of course, just because you gift something doesn’t mean you avoid a gift tax. Fortunately, Section 408 of the PATH Act clarified that there is no gift tax when giving to a 501(c)4. This helped clarify the IRS’s previous answer which said it wouldn’t use resources to go after folks for a gift tax that may or may not exist (you have to love this kind of “clarity” from the IRS). Now, giving to an organization other than a 501(c)3 or (c)4 may have different effects on whether your crypto gains are realized, so be careful about extrapolating beyond what’s discussed here without doing more research.
So what’s the best vehicle for you to give cryptocurrency to a nonprofit?
It depends (classic lawyer-speak). If the nonprofit has a wallet ready for donations, then you may be fine from the start. The challenge is that it does take some technical knowledge to set up a wallet and accept different currencies. This can take a lot of time for the nonprofit. Plus, an error could be catastrophic if done incorrectly. That’s particularly possible if a nonprofit doesn’t regularly deal with cryptocurrency directly (most do not).
Obviously, you want to make the transaction easier on the nonprofit. You’d prefer they spend their time on their mission and not towards becoming an expert in handling cryptocurrency. One way to deal with that is by using an intermediary. Let’s consider some factors.
1. Who are the agents doing the transfer?
If you’re giving to a private organization or the private organization is holding the wallet for the nonprofit, this could get challenging. That’s because if you’re giving a particularly large donation, the nonprofit will have to report that, and it could interfere with their public support test—a complicated test that can fill out its own essay. Failing this test can have the IRS reclassify them to a different type of nonprofit—a private foundation. In effect, it creates a long-term organizational burden. Note that this doesn’t make a difference if the recipient is a 501(c)4. If the intermediary giving to the nonprofit is instead a nonprofit itself—specifically, a public-support charity, including a donor-advised fund (DAF)—then this is ideal for a 501(c)3.
Takeaway: A nonprofit/DAF is the preferred intermediary for a 501(c)3 recipient, particularly for a large donation. This doesn’t matter so much for a 501(c)4, and in many cases they won’t gift to a 501(c)4 anyway.
2. Will the intermediary give to a 501(c)4?
Because the intermediary you’re using may be set up a certain way, it may not even be able to give to a 501(c)4. Or it may choose not to. In any case, be aware of this factor if your intent is to give to a 501(c)4.
3. Fees
Fees for these types of transfers vary by quite a bit. And when you’re talking large amounts, they can add up. Whether the fees are paid by you or the nonprofit, it’s all the same loss.
4. Bureaucracy
You’ll get some paperwork no matter who you go with but nothing overwhelming. You already mastered buying and selling crypto; it’s doubtful this will be any harder.
If your gift is over $500 to a 501(c)3 and you intend on making a tax deduction, then you’ll be required to file IRS Form 8283. If your cryptocurrency gift is over $5,000, then you’ll have to get an accredited appraiser from someone with accreditation and familiar with cryptocurrency. This appraisal can cost about $600.
Below are the five main institutions analyzed in the table:
We’ve identified that the best cryptocurrency to give is the one that has appreciated the most and has been purchased over a year ago. But imagine if you acquired Bitcoin at multiple different times over the course of a few years. Can you specify exactly which batch of Bitcoin you want to donate? Maybe.
If you haven’t been keeping good records, then the default accounting principle is first in, first out. This means that your oldest coins are assumed to be the ones you are giving away. Unfortunately, that may not be the most tax-efficient approach, depending on the fluctuation of the coins in your wallet. Let this be an incentive to keep good records.
Now, if you have kept good records, then yes, you can articulate which coins you want to donate. (See Q39, Q40 on the IRS FAQ section on cryptocurrency.) The IRS specifies the exact information you need to do this:
“You may identify a specific unit of virtual currency either by documenting the specific unit’s unique digital identifier such as a private key, public key, and address, or by records showing the transaction information for all units of a specific virtual currency, such as Bitcoin, held in a single account, wallet, or address.
This information must show:
(1) the date and time each unit was acquired;
(2) your basis and the fair market value of each unit at the time it was acquired;
(3) the date and time each unit was sold, exchanged, or otherwise disposed of; and
(4) the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.”
So keep good records! It’ll pay off.
It’s important to spell this part out.
Rule #1: Do not realize your gains.
The number one rule of giving a long-term appreciated asset is that you do not realize your gains. If you sell your cryptocurrency or even trade it for another currency, then you have realized the gains. You now have an enormous tax bill. Don’t do that.
Rule #2 Do not realize your gains.
Always give the cryptocurrency directly to the nonprofit or a nonprofit/DAF intermediary. This is the only way that you can avoid realizing your gains. You do not want to make a 6-figure mistake. I’ve seen it happen, and it isn’t pretty.
Rule #3 Keep good records
If you don’t keep good records, then you can’t cherry-pick your best cryptocurrency to give.
Rule #4 Hold longer than a year
Holding longer than a year is what makes your crypto a long-term asset. This is the only way you’ll have the option of deducting the current fair market value of the coin.
Giving to a 501(c)3 (using common coins)
Every.org, Endaoment, and Fidelity Charitable are going to give you the most efficient transfers to your favorite 501(c)3 nonprofit. You’ll get the most popular crypto options as well. The amount you give—even if it’s a whole lot—won’t be an issue here.
Giving to a 501(c)3 (using less common coins)
If you want to give using less common cryptocurrencies, your first look may be at Endaoment. If your coin of choice isn’t there, then you may consider talking with the nonprofit about setting up a Giving Block or Engiven account. If this is the case, the gift will likely have to be quite large to make sense—well into the six figures—for Engiven because of its startup cost to the nonprofit.
If your gift using an unusual cryptocurrency is very large, then it gets tricky because neither Giving Block nor Engiven uses a nonprofit or DAF intermediary. This is that public support test issue mentioned earlier. Don’t cause your favorite nonprofit to fail this. The sensitivity to this kind of issue will depend on an organization’s size. (If you do know of a public charity nonprofit or DAF intermediary that accepts less common cryptocurrency, please reach out to me.)
As a quick heuristic, if your individual gift makes up more than half the organization’s typical annual income, they’ll likely have to go to their accountant and crunch numbers to decide about how to break the gift up over multiple years. You’ll have to find a DAF or nonprofit intermediary not on this list that can accept your preferred cryptocurrency if you want to get around this.
If the amount you’re giving in this less common cryptocurrency is sufficiently large (say, 6-7+ figures) yet acceptable for the nonprofit’s public support test, then it may be worth finding an expert to help with the transaction. Please, do not just tell the nonprofit to go get a wallet or follow some tutorial. This is unusual for them and will take away from their work. Plus, a mistake will be catastrophic. Offer to hire a professional for the nonprofit to help with the transaction to make the burden as small as possible for them.
Giving to a 501(c)4 (common and uncommon coins)
If you want to give to a 501(c)4, then Engiven is the only intermediary that allows this. Fortunately, they accept a lot of different coins. A 501(c)4 does not have a public support test, so you don’t need to factor this into the size of your gift.
If your gift goes far into the six or seven figures, then the fee will start to get high. Here, the same advice as before applies. Offer to hire a professional to help the nonprofit accept the gift. Make your gift easy for them.
When looking at a nonprofit’s cause area, you should also consider factors like (1) importance, (2) neglectedness, and (3) tractability. Importance tells you how much beneficial impact there would be if the cause was solved. Neglectedness tells you how much attention the particular cause area gets. Tractability tells you how likely the cause area is to be solved given a particular intervention.
One area that looks at such metrics is Givewell. You could do far, far worse. Most people do. Givewell gives to causes that have been vigorously evaluated according to these metrics. You should check them out. One of the reasons Givewell is great is that it falls under effective altruism. Effective altruism is about using reason to do the most good you can do with limited resources and recognizing that not all actions have the same impact.
And here’s a plug for the charity I run, The Center for Election Science (CES). CES is also a grant recipient of the Open Philanthropy Project, a funder within the effective altruism space. You can also read our year-end appeal to the effective altruism community.
The Center for Election Science studies and advocates for better voting methods beyond our terrible choose-one voting method. By having a better voting method, we can elect better people to office so that we have policies and spending that actually reflect our interests. You can donate, including through crypto via Engiven (for less common crypto) and Every.org (our preference for more common crypto). You can learn more about CES on its website.
Whether you’re in a position to donate $1K or $1B, think deeply about how you want to impact the world. Think about where you want the world to be, what kinds of suffering you want to reduce, what kinds of risks you want humanity to avoid, and what kinds of opportunities for joy you’d like others to experience. Particularly if you’re donating a larger amount, this is a lot of responsibility.
Also, as you’ve gathered, this is all quite complicated. There are also providers like cryptotrader.tax that specialize in general tax problems with cryptocurrency. I’ve done the best I can to make this digestible, but all of our situations are different. If you’re making an especially large donation, it’s always a good idea to talk with a tax advisor who has expertise in philanthropic giving and cryptocurrency.
Good luck, and feel free to reach out!
Thanks for this writeup. I'd also add that EA Funds accepts cryptocurrency donations, is tax-deductible in the US (501[c][3]), the UK, and the Netherlands, and doesn't charge additional fees (fees are just whatever our exchange charges us, which is typically on the order of 0. 2% or lower). Donations can be made to any of our four Funds, or to a list of ~40 supported effective non-profits.
At the moment you need to get in touch with us directly to make donations, we support ~20 coin types, and our minimum donation size is $1,000+ or equivalent. However, we're planning to roll out a new system (integrated with the normal donation form on our website) that supports over 120 coins and will have much lower minimums in the next month or so.
(Disclosure: I'm a co-founder of EA Funds)