Looking to reduce your taxable income with a donation of virtual currency to charity? The Internal Revenue Service (IRS) has issued guidance for donors (and charities) on the FAQ page of its website.
The IRS addressed whether gifting virtual currency to a charity could result in income, gain, or loss. The IRS confirmed that if you donate virtual currency to a charitable organization, you will not recognize income, gain, or loss from the donation. That’s the same result as giving stock or other appreciated assets, which are also characterized as capital assets.
The IRS also explained how to calculate the value of a gift of virtual currency to a charity. It’s fairly simple: your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation. That’s only true, however, if you have held the virtual currency for more than one year. If you have kept the virtual currency for one year or less, your deduction is the less of your basis (cost plus adjustments) in the virtual currency or its fair market value at the time of the contribution.
The IRS also addressed the charity’s responsibilities for gifts of virtual currency (you’ll see those answers at 35 and 36 of the FAQ). We all know that keeping records is super important for charities and donors. Typically, a charitable organization should provide a contemporaneous written acknowledgment for donations of more than $250; that remains true for virtual currency donations. And, the rules don’t change at higher dollar levels. A charitable organization is generally required to sign a donor’s Form 8283, Non-cash Charitable Contributions, acknowledging receipt of the property if the donor is claiming a deduction of more than $5,000; that’s still true for gifts of virtual currency. The signature confirms the date and receipt of the property and is not a confirmation of the value of the contributed property (that remains the responsibility of the donor).
What about the charity’s reporting requirements to the IRS? A charitable organization that receives virtual currency should treat the donation as a non-cash contribution. Those are reported on a Form 990-series annual return. Also, charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property – and that includes the sale of virtual currency for real currency – within three years after the date they initially received the property. The donor also gets a copy of the form.
The IRS previously issued guidance in 2014 to taxpayers, making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. (You can read more on the taxation of cryptocurrencies like Bitcoin here.)