Fund a DAF with Cryptocurrency

What is a Cryptocurrency?

A cryptocurrency is a form of digital currency that uses cryptography and blockchain technologies to encrypt, secure, and verify transactions and proof of ownership. Notably, cryptocurrencies do not require a central authority to maintain their systems. By design, cryptocurrency is intent on protecting user privacy, and it allows users to have some degree of anonymity.

How does it work?

Cryptocurrency is an asset that can be used to fund your Donor-Advised Fund. It’s easy to transfer and liquidate without significant cost, and since the IRS treats virtual currency as property and not currency, depending on how long you’ve held it and how you acquired it, it could be worth significantly more than you think.

Long-term Capital Asset Donations of Bitcoin held over a year can receive a fair market value deduction up to 30% of adjusted gross income. Much like appreciated stock, this is an ideal situation for donating Bitcoin. For example, Joe buys Bitcoin at $1000 and after holding it more than a year, it is now valued at $2700. If Joe donates the entire value, he may deduct up to $2700.
Short-term Capital Asset Donations of Bitcoin held less than a year will receive a deduction of the lesser of cost basis or fair market value up to 50% of adjusted gross income. Bill buys Bitcoin for $600 and in just five months the value has grown to over $2000. If Bill donates the Bitcoin, he is limited to a deduction of $600. On the other hand, if Bill buys the Bitcoin for $600 and the value declines over five months to $400, his deduction will be $400. 

For donations of virtual currency over $5,000, the donor must obtain a qualified appraisal no earlier than 60 days before the date of the contribution and no later than the date of the donor’s tax return for the year of the gift. It’s important to seek advice from your CPA regarding the characterization and tax treatment of any gains or losses before donating virtual currency. 

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