Donate and Buy-Back – Tax Benefits of Giving Bitcoin, Ethereum, and other Crypto
If you’re a crypto holder–in for the long run–then you should know about “cost basis.” It’s the value the IRS uses to calculate the income you’ve gained or lost when you dispose of your crypto holdings, and thereby determine your tax treatment (sale price minus cost basis). Your cost basis in a given capital asset is typically the price you originally paid to own it.
There may be a time when you need some extra fiat currency on hand, and exchanging warm, intangible coin for cold, hard cash is necessary; if you’re selling at a higher value than you bought, Uncle Sam will want a piece of that pie. It’s called capital gains tax. For crypto veterans, a capital gain is inevitable when you sell–despite recent dips, you’re far ahead of the late 2000s and 2010 prices. And you’ll be obliged to pay taxes on those gains.
Donating your appreciated crypto can help minimize that obligation. Let’s take a look at an example.
Harry Hodler is a generous donor to his local pet shelter. This year he planned on making a $20,000 gift to their Japanese canine program–he just loves those pups.
Harry has the cash on hand, but he’s also a savvy investor: in January 2017, he purchased a single Bitcoin for $900, and despite the recent downturn, he’s still around $20,000 ahead as of July 2022. If Harry needed to sell that coin, he’d owe about $3,000 in long-term capital gains taxes, for which he’s taxed at 15%.
Here’s a handy run-down from NerdWallet …
Before making his donation in cash, Harry hits pause: there’s got to be a better way.
If an investment that you’ve been holding for more than 12 months has gone up in value, and if you’re planning on making a charitable contribution, donate some or all of your investment instead of cash. Next, use the cash you would’ve donated to buy back the investment at the current price. (FiveCentNickle.com)
Instead of sending a $20,000 check to his local pet shelter to support those pups and holding onto a Bitcoin with a $900 cost basis, Harry decides to donate the 2017 Bitcoin itself (using a site like cryptoforcharity.io), and then buy another Bitcoin at today’s price using the $20,000 he was otherwise going to donate. He’s still left with one Bitcoin, but its cost basis is $20,000, reducing any future capital gain.
If he were to time the market and sold the coin for $60,000, he would have avoided almost $3,000 in extra tax. Go, Harry!
In the US, wealthy donors have relied on this trick for years by donating appreciated stock, but crypto holders can–and should–be exploring similar pathways. It’s a simple process that can significantly impact your future earnings.
In summary:
Capital gains are measured by the selling price minus the cost basis (i.e., the price you first paid).
You can reset the cost basis by donating a long-term capital asset, in this case, crypto, and using your cash to repurchase it at today’s rate.
This reset will minimize future capital gains on the asset’s appreciation and, therefore, tax obligations.
You can use a site like Crypto for Charity to donate crypto in support of nonprofits.
Resources:
Happy Giving.
- David and the C4C Team
