04-30-2025, 02:32 PM
http://www.pgdc.com/pgdc/charitable-gift...iderations
Summary
Contributing author Bryan Clontz explores the implications of gifts of Bitcoin and other virtual currencies.
By: Bryan Clontz, CFP®, CAP®
Introduction
The popular virtual currency, Bitcoin, has been a news fixture since its introduction in 2009.[1] Bitcoin is the world’s leading virtual currency, with a market capitalization currently approaching $5 billion.[2] Donors and their advisors are now exploring various charitable giving opportunities using virtual currencies. The Internal Revenue Service (“IRS”) describes virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”[3] It is designed to operate like legal tender, and serve as a medium of exchange, although it is not currently recognized as legal tender anywhere in the world.[4]
Currently, Bitcoin and other virtual currencies, such as Ripple and Litecoin, represent a total market capitalization of nearly $6 billion.[5] Many large charities are eager to tap into this market or have already received virtual donations, such as United Way Worldwide, which recently began accepting donations of Bitcoins.[6] Smaller nonprofits have begun accepting the currency as well.[7] This article discusses charitable donations of virtual currencies, including tax, appraisal, legal, and processing considerations.
Tax Considerations
In March 2014, the IRS issued a Notice on the tax treatment of transactions involving virtual currency.[8] Most importantly, the IRS stated that, for tax purposes, virtual currencies are property and not currency.[9] This means that traditional gain and loss principles will apply; the IRS treats these assets as securities or business property. A party selling, spending, or otherwise disposing of virtual currency may be subject to capital gains or ordinary income tax. Since the charity will be selling the currency, exempt organizations are not generally taxed on income, even from the sale of appreciated property.[10]
The major tax implications for donations of virtual currency, therefore, involve the donor. The main consideration for donors is the charitable income tax deduction received. The gain can be ordinary or capital, depending on the source of the virtual currency to the donor. The determination on the type of gain or loss recognized depends on whether the donated virtual currency was held as a capital asset for investment purposes.[11] If the property was not held as an investment, it would be subject to ordinary gain or loss treatment – this is more likely to be the case if the donor is a so-called “miner” or where the virtual currency is otherwise income.[12]
These possibilities lead to three potential tax results for donors of virtual currency. First, a donor giving virtual currency held short term (ie: less than one year) as a capital asset will be able to deduct the lesser of cost basis or fair market value up to 50% of adjusted gross income.[13] However, if the donor held the Bitcoin or other currency for more than a year as a capital asset, the deduction would be the fair market value of the gift up to 30% of adjusted gross income.[14] Finally, if the currency is subject to ordinary gain or loss treatment in the hands of the donor, the donor may deduct the cost basis of the gift up to 50% of her adjusted gross income.[15] If Bitcoin was received as ordinary income as payment for services rendered or property sold, the donor may only deduct the cost basis. The IRS defines the cost basis of the virtual currency as its fair market value when it was received.[16] So if the donor was paid Bitcoin worth $500 for professional services, and that Bitcoin later appreciated to $1,000 USD, the donor’s charitable income tax deduction would be limited to $500, or cost basis.
These rules are very favorable to donors holding appreciated virtual currency as capital assets, allowing them to avoid incurring a tax for capital gains on the Bitcoins or other currency.[17] Note that this donation would also allow the donor to avoid the 3.8% Medicare surcharge on investment income.
Appraisal Considerations
A major concern for potential donors of virtual currencies will be complying with IRS appraisal requirements. The Service requires that donors claiming total deductions of over $500 on noncash donations file Form 8283.[18] Due to the IRS ruling that virtual currency is property, donors of such currencies must therefore file Form 8283 if their deductions exceed the statutory threshold.
More importantly, however, is that the IRS requires a qualified appraisal for donated property over $5,000 in value.[19] Although there is an exception for publicly traded securities, it seems improbable that virtual currency would be deemed qualified appreciated stock. This is because the IRS defines a “publicly traded security” as one that is “[l]isted on a stock exchange in which quotations are published on a daily basis,” or “regularly traded in a national or regional over-the-counter market for which published quotations are available.”[20]Although there are online virtual currency exchanges, these are not stock exchanges, and hence do not qualify under the first category. The second category is a closer case, because although price information about virtual currencies is easily located online, it is difficult to say that virtual currencies fit within the sort of market described. Hence, virtual currencies probably do not fall within the IRS definition of “publicly traded security” for noncash donation purposes.
This means that anyone planning to donate more than $5,000 worth of virtual currencies should arrange for an appraisal of the currency’s value from a qualified appraiser. [Disclaimer: The author’s firm, Charitable Solutions, LLC, offers appraisal services.] This may prove difficult, given the IRS requirements that the appraiser be “qualified” – that is, possessing “verifiable education and experience in valuing the type of property being appraised.”[21]This requirement poses a difficulty to donors considering large gifts of virtual currency, because virtual currencies were only recently introduced. As a result, “it may be difficult to find a qualified appraiser” with the requisite education and experience.[22] For this reason, it may be wise for potential donors to limit their total contributions to all charities in virtual currency form to less than $5,000.[23]
Summary
Contributing author Bryan Clontz explores the implications of gifts of Bitcoin and other virtual currencies.
By: Bryan Clontz, CFP®, CAP®
Introduction
The popular virtual currency, Bitcoin, has been a news fixture since its introduction in 2009.[1] Bitcoin is the world’s leading virtual currency, with a market capitalization currently approaching $5 billion.[2] Donors and their advisors are now exploring various charitable giving opportunities using virtual currencies. The Internal Revenue Service (“IRS”) describes virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”[3] It is designed to operate like legal tender, and serve as a medium of exchange, although it is not currently recognized as legal tender anywhere in the world.[4]
Currently, Bitcoin and other virtual currencies, such as Ripple and Litecoin, represent a total market capitalization of nearly $6 billion.[5] Many large charities are eager to tap into this market or have already received virtual donations, such as United Way Worldwide, which recently began accepting donations of Bitcoins.[6] Smaller nonprofits have begun accepting the currency as well.[7] This article discusses charitable donations of virtual currencies, including tax, appraisal, legal, and processing considerations.
Tax Considerations
In March 2014, the IRS issued a Notice on the tax treatment of transactions involving virtual currency.[8] Most importantly, the IRS stated that, for tax purposes, virtual currencies are property and not currency.[9] This means that traditional gain and loss principles will apply; the IRS treats these assets as securities or business property. A party selling, spending, or otherwise disposing of virtual currency may be subject to capital gains or ordinary income tax. Since the charity will be selling the currency, exempt organizations are not generally taxed on income, even from the sale of appreciated property.[10]
The major tax implications for donations of virtual currency, therefore, involve the donor. The main consideration for donors is the charitable income tax deduction received. The gain can be ordinary or capital, depending on the source of the virtual currency to the donor. The determination on the type of gain or loss recognized depends on whether the donated virtual currency was held as a capital asset for investment purposes.[11] If the property was not held as an investment, it would be subject to ordinary gain or loss treatment – this is more likely to be the case if the donor is a so-called “miner” or where the virtual currency is otherwise income.[12]
These possibilities lead to three potential tax results for donors of virtual currency. First, a donor giving virtual currency held short term (ie: less than one year) as a capital asset will be able to deduct the lesser of cost basis or fair market value up to 50% of adjusted gross income.[13] However, if the donor held the Bitcoin or other currency for more than a year as a capital asset, the deduction would be the fair market value of the gift up to 30% of adjusted gross income.[14] Finally, if the currency is subject to ordinary gain or loss treatment in the hands of the donor, the donor may deduct the cost basis of the gift up to 50% of her adjusted gross income.[15] If Bitcoin was received as ordinary income as payment for services rendered or property sold, the donor may only deduct the cost basis. The IRS defines the cost basis of the virtual currency as its fair market value when it was received.[16] So if the donor was paid Bitcoin worth $500 for professional services, and that Bitcoin later appreciated to $1,000 USD, the donor’s charitable income tax deduction would be limited to $500, or cost basis.
These rules are very favorable to donors holding appreciated virtual currency as capital assets, allowing them to avoid incurring a tax for capital gains on the Bitcoins or other currency.[17] Note that this donation would also allow the donor to avoid the 3.8% Medicare surcharge on investment income.
Appraisal Considerations
A major concern for potential donors of virtual currencies will be complying with IRS appraisal requirements. The Service requires that donors claiming total deductions of over $500 on noncash donations file Form 8283.[18] Due to the IRS ruling that virtual currency is property, donors of such currencies must therefore file Form 8283 if their deductions exceed the statutory threshold.
More importantly, however, is that the IRS requires a qualified appraisal for donated property over $5,000 in value.[19] Although there is an exception for publicly traded securities, it seems improbable that virtual currency would be deemed qualified appreciated stock. This is because the IRS defines a “publicly traded security” as one that is “[l]isted on a stock exchange in which quotations are published on a daily basis,” or “regularly traded in a national or regional over-the-counter market for which published quotations are available.”[20]Although there are online virtual currency exchanges, these are not stock exchanges, and hence do not qualify under the first category. The second category is a closer case, because although price information about virtual currencies is easily located online, it is difficult to say that virtual currencies fit within the sort of market described. Hence, virtual currencies probably do not fall within the IRS definition of “publicly traded security” for noncash donation purposes.
This means that anyone planning to donate more than $5,000 worth of virtual currencies should arrange for an appraisal of the currency’s value from a qualified appraiser. [Disclaimer: The author’s firm, Charitable Solutions, LLC, offers appraisal services.] This may prove difficult, given the IRS requirements that the appraiser be “qualified” – that is, possessing “verifiable education and experience in valuing the type of property being appraised.”[21]This requirement poses a difficulty to donors considering large gifts of virtual currency, because virtual currencies were only recently introduced. As a result, “it may be difficult to find a qualified appraiser” with the requisite education and experience.[22] For this reason, it may be wise for potential donors to limit their total contributions to all charities in virtual currency form to less than $5,000.[23]