Everyone knows it’s a tax-smart move to donate a long-term appreciated security to support your favorite charity. Even better when the security has appreciated over 800% in the past year. Bitcoin, as with most types of cryptocurrency, has experienced dramatic increases in price and popularity, both in investment circles and as a form of payment. Yet it remains underutilized as a funding source for charitable giving. Here are three things to know when looking to maximize this digital asset for client impact:
1. How Cryptocurrencies Work
The oldest and most well-known digital asset, bitcoin, was created in 2009 as a decentralized form of exchange, traced through a ledger or blockchain to track ownership. Other types of cryptocurrency continue to be established and used as forms of exchange on public and private platforms. The number of bitcoins is limited to 21 million, and the way to create more is to “mine” them by using sophisticated and energy-intensive computers and algorithms.
There are only about 2.3 million bitcoins left to be mined, but cryptocurrency exchanges do exist to facilitate in the purchase and sale of these assets. These exchanges offer another platform for individuals to monetize their holdings by providing an exchange to other forms of currency.
The increased popularity, value, and growth of cryptocurrency has not gone unnoticed. In 2014, the IRS classified Bitcoin (and other cryptocurrencies) as property for Federal income tax treatment. By 2020, it was included on the holdings page of the 2020 Federal Tax Return.
2. Why Clients Hold Bitcoin In Their Portfolios
As with any cryptocurrency, bitcoin is an asset with a store of value and people may hold it for several reasons. One could be that they are passionate about the digital asset space and may even be early adopters. For others, bitcoin is seen as a way to further diversify a portfolio, instead of relying on more traditional securities.
Current market conditions create large growth in certain sectors and among certain assets, including cryptocurrency. This type of appreciated asset can serve as a catalyst for charitably minded clients.
3. The Advantage Of Gifting Appreciated Assets
For clients with long-term appreciated cryptocurrency in their portfolio, consider discussing the benefits of contributing a portion of their holdings to a charity. If your client’s charity does not have the ability to handle a cryptocurrency donation, consider a donor-advised fund sponsor, like Fidelity Charitable, who has the expertise to process this type of contribution.
Assets held for more than a year will qualify for long-term capital gains tax treatment following the sale of the asset. Many people forget this, but according to current IRS rules, your client will need to obtain an independent qualified appraisal to establish a Fair Market Value for the asset at the time of the contribution.
If your client has acquired different units of cryptocurrency at different times and prices, they will want to donate units of cryptocurrency with the lowest tax basis. To do so, your client should specifically identify which units are being donated. If unable to do so, the units are considered on a first in, first out (FIFO) basis.