How Can You Benefit From Tax Reductions on Crypto Donations?

• Crypto donations can help owners levy some of their taxes.
• However, the donor should abide by all the laws, as mentioned, while filing the ITR.

The cryptocurrency market has witnessed increased attention in the past few years, with more investors realizing its potential and finding lucrative opportunities. There are more than a thousand cryptocurrency projects to invest in at present, with more than billions of dollars locked in the market. 

Owing to their infancy (a decade old), volatility, and lack of awareness, there are currently no proper regulations around cryptocurrencies. There are still several lawsuits pending in the courthouse. During this turmoil, the users need to carefully judge their position and pay the required taxes on their crypto holdings. 

Crypto Taxes on Donations

As the year rounds up and the day for annual returns arrives, cryptocurrency owners look for several ways to benefit from tax reductions. By donating some of their assets, they can benefit in two major ways, first, by getting tax deductions due to the donation, and second, by avoiding the capital gain tax. 

Suppose a person initially bought Bitcoin for around $5000 and held it for more than a year. Now, the price has reached $25,000 and if he sells it now or purchases goods through them, then the user would have to pay a capital gain tax on more than $20,000. As the holding period exceeds 1 year, the tax would be calculated at long-term rates. 

If the person decides to donate the coin instead, then the person is exempt from the capital gain tax. Also, he may receive a tax deduction based on his contribution, and combined with the previous, both will help the user save more than $14,000 in tax. 

Based on the donation amount, there are certain other rules that the taxpayer may follow. Donors should keep records and receipts from their charity as proof and produce them when asked. The name and address of the charity and the type of crypto coin should be mentioned in the receipt if the donation amount is less than $250.

However, it  would contain some specific details if the amount exceeded $250 but was less than $500. Also, if the charity, on account of the donation, gave the donor any good faith, then the estimated value of the good should be mentioned in the tax return of the year the donation was made by the donor. 

For amounts lying between $500 and $5000, the donor needs to fill out the Noncash Charitable Contribution Form (IRS 8283). If the donations exceed $5000, along with the aforementioned form, Schedule B also needs to be filled out, and in both scenarios, this form should be attached to the tax return for that year. 

From the point of view of the charity, the increasing tax benefits for the donors will surely encourage them to adopt the latest infrastructure to accept crypto donations. First and foremost, the organization has to decide whether it will accept those payments directly or through secondary parties like donor-advised funds. In the case of direct acceptance, the organization should be ready to produce the receipt (contemporaneous written acknowledgment) that it gave to the donor. 

Conclusion

If the user has made the transaction through a cryptocurrency exchange, then the IRS will consider the value noted by it and expect the user to mention the same in the tax report. However, if the transaction is made either peer-to-peer or through any other method not involving exchanges, then the price is evaluated by using blockchain explorers. These can determine the exact price of a digital asset, after global analysis, at any particular date and time.