As the year-end rolls around many individuals are faced with the question of how to best support their favorite charities, while also offsetting their tax burden. People tend to reach for their credit card first, but donating appreciated assets like cryptocurrency or stocks can be a much more tax-efficient way to support your favorite cause.
When assets are donated directly to nonprofits, donors not only receive a larger deduction, but the nonprofit also receives a larger donation.
How does that compare to selling your cryptocurrency or stocks and then donating the cash proceeds? If you sell your appreciated cryptocurrency, most countries require that you pay capital gains on the appreciated amount which can often range from 20-30%. That means you’d have to pay that tax and then donate the after-tax proceeds, meaning a smaller donation.
Before we start - here are some terms you need to know:
Capital Gains Tax: a tax on the profit realized on the sale of an asset.
Fair Market Value: the price that an asset would sell for on the open market
Cost Basis: the original value of an asset for tax purposes, usually the purchase price.
Below we will break how and why you should donate assets like cryptocurrency, stocks, real estate, and art.
How Can I Donate Cryptocurrencies Like Bitcoin to Charity?
In the US, the IRS classifies cryptocurrency as property. Similar to other property donations, that means the donor does not have to pay the capital gains tax they would otherwise owe and claim a fair market value deduction. That can often mean a 20%+ larger donation and deduction. Donating bitcoin directly can benefit both the donor and the nonprofit, by bypassing the capital gains tax.
By donating bitcoin to nonprofits directly, the tax deduction is equal to the fair market value of the donated cryptocurrency amount. The charity will receive the full value of the gift because capital gains tax does not have to be paid by a nonprofit which is a tax-exempt organization.
Does your nonprofit accept cryptocurrency donations? Contact us to learn more.
How Can I Donate Publicly Traded Securities and Stocks?
Giving appreciated stock is up to 20%+ more tax-efficient than cash at zero additional cost to you. Donating stock directly protects capital gains tax, which means a higher tax deduction for you, and the nonprofit can receive the full value of your donation. It’s a win-win situation.
If appreciated shares are sold first and then donated, capital gains tax must be paid. Donating appreciated assets keeps the most money going directly to a nonprofit.
Appreciated securities that have been held for over a year are eligible to deduct at fair market value instead of cost basis, which allows for higher deductible amounts. This also will not trigger capital gains tax.
Does your nonprofit accept donations of stocks or securities? Overflow, a Silicon Valley-based technology company has automated the charitable stock donation process, eliminating the need to coordinate with brokers or financial advisors and reducing the transfer process from weeks to days. Overflow makes donating public stock quick, frictionless, and secure.
How can I donate real estate to nonprofits?
Holding onto highly appreciated real estate for over a year? Consider donating it to a donor-advised fund or charity, especially if the property is easy to liquidate, market, and is debt-free. This will avoid triggering the capital gains tax and allow for fair market value tax deduction for the donation.
It is imperative to value your property accurately, before donating directly to nonprofits. If your property is worth more than $5,000 it must be appraised by a qualified appraiser. If the deduction is greater than $500,000 the appraisal must be attached to your tax return.
If the real estate market is down but your property still holds great value, donating your real estate directly to nonprofits is a great way to divest yourself of the property. As always consult your tax advisor if you are interested in donating property to a nonprofit.
How to donate art to charity?
To get a deduction equal to the fair market value of the work it must be donated to a public charity or private operating foundation. The donor also must anticipate the charity will be able to use the work “related” to its exempt purpose.
Similar to real estate, you must determine the fair market value of the art. If your art is worth more than $5,000 it must be appraised by a qualified appraiser.
The most difficult part of donating art to charity is filling out the related-use requirement. Related use means that the art donated directly to the nonprofit is being used in line with their mission. For example, you can donate a painting to an art museum to be used as an educational tool.
The organization that receives the art donation must use the art as the relevant use for at least a year, before changing its use. If the art is valued for more than $5,000 then that changes to 3 years.
Why Are Direct Asset Donations Better for Nonprofits?
The bottom line is that donating assets directly to a nonprofit is better for the nonprofit and the donor. The donor avoids the capital gains tax and gets a larger deduction while the nonprofit can retain the full amount since they are a tax-exempt organization.
So, would you rather donate to the IRS or your favorite cause?
Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.