Virtual currencies have been much in the news the last few years, with Bitcoin getting by far the most attention. That's partly because of its incredible growth in value, going from less than $1 in early 2011 to nearly $1,000 at the end of 2013, before dropping into the mid-hundreds throughout 2014.
A virtual currency functions much like traditional (or “fiat”) currency, but all transactions occur online, and it is not regulated by any government. Bitcoins are created through the process known as “mining,” which involves verifying all Bitcoin transactions as they occur, and hence limits the supply of the currency. People obtain Bitcoins by creating digital “wallets,” which allow them to deposit fiat currency and then transmit it to other wallets in exchange for virtual currency. Wallets are the primary method of transmittal for consumers, and each user has a unique key they share to send or receive Bitcoins.
Along with the growing popularity of Bitcoin, the number of charitable organizations that accept virtual currencies has been growing. At the same time, so has government scrutiny, creating uncertainty about the continuing value of Bitcoin, Ripple, Litecoin, and other, smaller currencies. In March, the Internal Revenue Service issued its long awaited opinion on the taxation of virtual currencies, ruling they should be treated as property, not currency. That creates administrative and paperwork problems for those using Bitcoin, but also allows donors to obtain generous charitable income tax deductions for donating Bitcoin that is worth more than they paid for it, just as they do for giving appreciated stock to charity.
How can you contribute to the public good with your virtual currencies? This post outlines the virtual currency donation process in three steps. First, is determining whether the charity you want to donate to accepts virtual currency.
Step 1: Does the Charity Accept Virtual Currencies?
Determining which nonprofits accept donations of Bitcoin is probably the most challenging part of the entire process. There are likely a few reasons for this---the newness of virtual currencies, the uncertain regulatory atmosphere, and frankly, the sometimes-suspect association of Bitcoin with crimes (such as the on line drug marketplace, Silk Road).
With that said, the tide does appear to be turning towards acceptance. The most notable news in this area was the September, 2014 announcement that Bitcoins would be accepted by United Way Worldwide, the largest charity in the nation as measured by public donations. It is not alone among nonprofits though. The Wikimedia Foundation, which runs Wikipedia, accepts donations of Bitcoins. Another notable example is the BitGive Foundation, which recently received 501(c)(3) charitable tax-exempt status from the IRS, and aims to create a Bitcoin-based investment fund for public health and environmental organizations. An African Bitcoin remittance company has even set up a charity sending donations of the virtual currency to help charities in Sierra Leone in the fight against Ebola.
What if the nonprofit you want to donate to doesn’t accept Bitcoins or any other virtual currency? Your best bet is probably to get in touch with someone at the organization and ask them if they are interested in receiving such a donation. They may be willing to accept the donation once they look into the ease of transfer and liquidation. Or a third party national donor advised fund, like the Dechomai Foundation, can process the donation and then grant the proceeds to the charity(ies) the donors recommend. (Full disclosure: I founded Dechomai and while I do not sit on its governing board, my business Charitable Solutions, LLC., provides its day-to-day managerial and administrative functions.)
Step 2: Donating Your Virtual Currency
Next is the actual transaction. You will simply transmit your chosen amount from your wallet to the nonprofit’s, using its public wallet address. The nonprofit should then issue you some sort of receipt, particularly if the gift had a value of over $250. That’s all there is to it.
If the nonprofit is not set up to receive donations of Bitcoins, the donation process might be trickier. You may have to work with the nonprofit to explain that it needs to either set up its own virtual currency wallet, or set up an account with a virtual currency payment processor. One such processor, BitPay, will process payments free of charge for registered 501(c)(3) organizations, and will also liquidate the donated Bitcoins and deposit the resulting fiat currency directly into the nonprofit’s bank account. A processor like BitPay can make accepting donations a lot less intimidating for the nonprofit. You might also have to remind them that you need a receipt, just like they would issue for any other donation. Even if they have no prior experience with virtual currencies, the actual donation process should not be difficult.
One final note on the donation process. The IRS requires that you file Form 8283 with your tax return if you are taking a deduction for noncash donations over $500. (Remember, the IRS has decided to treat virtual currencies as property, not cash, so the 8283 is required for Bitcoin donations over $500.) Further, if you are taking a deduction on a donation valued at more than $5,000, you are required to get an appraisal. It’s important to keep these requirements in mind, both when you’re making the donation, and when you’re filing your tax return.
Step 3: Determining Your Tax Deduction
The third and final step is the one that may require some actual calculations on your part. The March 2014 IRS guidance means that donations of virtual currency will be treated the same as donations of stocks, bonds, land, etc. Here’s where the calculations come in – the IRS allows different deductions depending on the period of time which you held the property for. In this case, that means that if you held the Bitcoins you donated for longer than a year, you will generally be able to deduct the full fair market value of the donation, up to 30% of your adjusted gross income, without having to recognize any taxable gain on them. That's the same highly favorable tax treatment you'd get if you were donating stocks with long term capital gains embedded in them, making it a tax efficient way to give.
If you held your Bitcoins for a year or less, however, your charitable deduction is only equal to the cost of Bitcoins to you, or their present value, whichever is less. (You can, however, use this deduction to offset up to 50% of your income.) Similarly, if you're donating Bitcoins you received as compensation or payment, you can only deduct you cost basis, or the Bitcoins' fair market value, whichever is less. In this case, cost basis is the fair market value at the time you received the Bitcoins as payment or compensation. So your deduction will just be the lesser of current FMV or the market value of the Bitcoins when you got them.
From beginning to end, donating virtual currencies like Bitcoin or Ripple is a fairly quick, easy, and streamlined process. It appears that more and more nonprofits are recognizing this, and accordingly, starting to accept virtual currency donations in turn. This is great news for prospective donors, who can easily transfer their funds to these nonprofits while at the same time receiving a generous tax deduction.
Bryan K. Clontz, CFP®, CLU, ChFC,
