Time is running out to make charitable contributions for the 2017 tax year. With virtual currencies trading at record highs, contributions of this pioneering property may be a viable option for some. The most common (and valuable) virtual currency is Bitcoin, which is valued at approximately $9,600 as of this writing and up over 900% year-to-date. Other popular virtual currencies include Etherum (valued at approximately $415) and Bitcoin Cash, a split-off of Bitcoin (valued at $1,260). For those riding the Bitcoin rocket ship (or, perhaps, the Bitcoin roller coaster), you may consider taking advantage of the following favorable charitable contribution tax rules.
First, the IRS has determined for federal tax purposes convertible virtual currency (e.g., Bitcoin) is treated as property, and general tax principles applicable to property transactions apply to transactions using virtual currency. See IRS Notice 2014-21. Therefore, the general rules as to charitable contributions of property apply to donations of virtual currency.
If a taxpayer has owned the donated unit of Bitcoin for more than a year at the time of the donation, his or her charitable contribution deduction equals the Bitcoin’s fair market value at the time of the donation, and, importantly, the taxpayer does not recognize gain on the contribution. If, however, a taxpayer has owned the Bitcoin for less than a year, his or her charitable contribution deduction is limited to the taxpayer’s basis.
Regarding value, the IRS has determined that transactions using virtual currency must be reported in U.S. dollars. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars at the exchange rate. Coinbase is a popular bitcoin exchange.
Generally speaking, if a taxpayer donates Bitcoin held as long-term capital gain property to a public charity, his or her charitable contribution deduction is limited to 30% of the taxpayer’s adjusted gross income (AGI) for the year. If, on the other hand, the taxpayer donates that same Bitcoin to a private foundation, the charitable contribution deduction is limited to 20% of AGI. A taxpayer may carry forward unused charitable contributions for up to five years.
If you have any questions regarding donations of virtual currency, please contact Chris Weeg at email@example.com or 214-749-2430.