Most people don’t use bitcoins as their usual form of currency, but did you know you may be able to use them to make a charitable contribution?
If you haven’t been following the hype, bitcoins are a form of digital currency not created or controlled by any central authority. You can purchase bitcoins on an exchange using traditional currencies.
Bitcoin values can fluctuate. When initially introduced, the value of a bitcoin was around US$1. The value has ballooned to nearly $1,000 in the past few years and is currently trading just north of $400. Because the value rises and falls, if an individual buys a bitcoin today for $400 and holds that investment for one year and one day, it may qualify for the preferential long-term capital gain treatment when donated to a charitable organization, assuming it has appreciated in value.
The IRS addresses tax consequences related to virtual currency transactions in Notice 2014-21, issued in 2014. In question-and-answer format, the IRS stated that, for federal tax purposes, virtual currency is treated as property and won’t generate a foreign currency gain or loss. However, the notice goes on to say if the currency is a capital asset in the hands of the taxpayer, an exchange will result in a capital gain or loss. The IRS cited Publication 544 for more information about capital assets and character of the gain or loss.
Bitcoins as Charitable Contributions
In late 2015, Fidelity Charitable announced it’s using a third party to convert bitcoins into assets that can be donated to a donor-advised fund and ultimately a charitable organization. Other charitable organizations are following suit across the country and accepting the virtual currency as a charitable donation.
As a donor, one of the benefits of using bitcoins is there may not be any transaction fees associated with using the digital currency. It’s up to donors to determine whether the intended recipient organization accepts the digital currency and how much, if any, charitable donation deduction they may be able to claim. Each donor should consult with his or her tax advisor to determine the donation deduction.
If you’re interested in making a charitable contribution using bitcoins, or if you want more information on how your not-for-profit organization can set itself up to receive contributions in the form of bitcoins, contact your Moss Adams professional.