Tax Planning

Crypto traders want to pay attention to this distinctive tax planning choice



Oh, December. It always feels like this month is sneaking up on us. For many it is the last chance to influence their tax planning. But in the hustle and bustle at the end of the year, there are a few things to consider.

The past 18 months have been a wild ride in the capital markets. From the lows in March 2020 to the highs in recent months, investors have done incredibly well. More investors who fearlessly entered the crypto market a few years ago could make substantial profits.

And that’s where taxes can be difficult.

“Think of cryptocurrencies as a stock. Sell ​​it for a profit in less than a year and it’s a normal income. More than a year and it will be taxed at long-term capital gains rates, “said Adam Markowitz, EA and Vice President, Howard L Markowitz PA, CPA

While recognizing a win may be the only option for crypto investors, a unique tax planning option is available: the ability to use your crypto holdings to donate to charity. As crypto becomes commonplace in investment portfolios, more and more Donor Recommended Funds (DAFs) and charities are accepting these holdings in their donations.

For many, this will be a significant planning option, but just because it’s permissible doesn’t mean it is easy. There are a few rules that crypto investors need to be aware of when donating to charity.

Control mechanics

Before we dive into how crypto can be donated, it is important to understand the mechanics of donating in kind to charities.

“In addition to monetary donations, individuals, partnerships and corporations can deduct from their tax returns for donated property,” said Lorilyn Wilson, CPA & CEO of Lookahead LLC and DueNorth PDX.

Publicly traded securities are generally donated material assets. In this situation, investors can receive a special two-part tax benefit. First, they do not have to recognize the capital gain; Second, they receive a charitable deduction when the stocks go to the charity or fund recommended by donors.

“But there are rules. Property donated with a total value of more than $ 500 (think goodwill donations, cars, etc.) also requires an additional form called Form 8283, ”says Wilson.

In the case of publicly traded holdings, only Part I of the form is required.

“The IRS requires you to make the charitable deduction at the fair market value of the property donated – and that is exactly the form that is being used,” says Wilson. “Questions like the name of the organization the donation was made to, the property description, the date the property was acquired and brought in, how much it cost and what the resale value is – all information is collected on this form.”

Donating stocks can be a powerful tax management tool, but charities and DAFs have historically been nervous about crypto. Things are changing and the door to donating crypto is now open.

Note the rules of evaluation

Donating crypto isn’t as easy as donating publicly traded stocks. The world of cryptography has not been transparent and the rules on donations reflect this.

“Suppose someone decided to donate their crypto or other non-publicly traded securities. Could they artificially inflate the value of their donated property in order to get a higher deduction and pay less tax? As always, the IRS is one step ahead of them, ”says Wilson.

For this reason, it is important to be aware of the other rules relating to Form 8283. Unlike publicly traded securities, a donation of cryptocurrency in excess of $ 5,000 requires a qualified valuation. Neither the IRS nor the SEC have taken an official position to treat cryptocurrencies as securities. The IRS has labeled cryptocurrency property, not currency.

A qualified appraiser must meet the IRS requirements, including the need to use a qualified appraiser who meets the requirements for training and experience. Qualified appraisers are usually licensed or certified in the state where the property is located.

In addition, the appraisal must not take place later than 60 days before the donation and at the latest on the due date of the tax return including supplements. The assessment is reported on Form 8283 and the appraiser must sign the form. No reviewer? No deduction.

Finding a crypto appraiser can be difficult, but as the technology grows in demand, more resources become available. Investors who use a donor advisory fund such as Schwab Charitable or Fidelity Charitable can also fall back on their expertise.

Investors should expect to spend roughly $ 500 to $ 1,000 on valuation fees, but the tax break can be worth it.

Ask your tax advisor

Ultimately, crypto investors should seek help from their tax advisor to ensure they are taking the appropriate steps to donate crypto to a DAF. It could mean the difference between having a great tax planning experience and disappointment with an ineligible deduction.

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