If you give regularly to charity, you probably use cash, checks, credit cards, or perhaps even appreciated stock to make your donation. But if you own bitcoins, have you considered donating them?
The popular virtual currency continues to gain traction, as an increasing number of merchants accept Bitcoin for payment. Already, some charitable organizations have the ability to accept donations in Bitcoin.
If you own Bitcoin, or are thinking of acquiring some, here’s what you need to know about using it for philanthropic purposes.
What is Bitcoin?
First, a quick primer. Bitcoin is one of a number of “virtual” currencies that have been created in recent years. Unlike real currency like the U.S. dollar, Bitcoin is not issued by a governmental entity.
Bitcoin is created in a process called “mining” in which prospectors use special mining software installed on computers to solve a complex algorithm. If the algorithm is solved, the “miner” receives new bitcoins in return, and the algorithm increases in difficulty for subsequent miners.
Bitcoin’s original creators set a limit on the total number of Bitcoin that can be mined to 21 million. To date, over 12 million bitcoins have been mined and are in circulation.
[Side note: The nomenclature for Bitcoin can be confusing. I will attempt to follow accepted use, which is “Bitcoin” when referring to the platform or community, and “bitcoins” when referring to units of currency.]
How Do I Donate Bitcoins?
If you want to use your bitcoins as part of your charitable giving, you need to make sure the charities you wish to support are able to accept gifts of bitcoins – and there aren’t many of those yet.
The charity will need to have a Bitcoin wallet or an account with a Bitcoin payment processor to be able to accept donations. Once that is done, the organization will then have a unique Bitcoin Deposit Address where you can direct your gift of bitcoins. Here’s an example.
If you serve on the Board of an organization that accepts bitcoins, be sure to have a set policy regarding conversion of bitcoins to dollars. The Bitcoin market is highly volatile, and the exchange rate can fluctuate dramatically in short periods. Best practice is to convert donations of bitcoins to dollars immediately.
Tax Rules for Donations of Bitcoin
In March, the IRS released Notice 2014-21 to address the tax nature of virtual currencies like Bitcoin. Under current law, Bitcoin is treated like property and is subject to the tax rules governing the acquisition and sale of property.
This means that for most donors, gifts of bitcoins will be treated just like gifts of any other capital asset. You will need to establish the fair market value of your gift at the time of the donation. Fortunately, the U.S. dollar-equivalent value of Bitcoin on any given day can be established using a Bitcoin exchange.
- If you held your bitcoins for more than one year, you can take a charitable deduction for the full fair market value as you would any long-term capital asset, subject to a limit of 30% of your adjusted gross income (AGI).
- If held for less than one year, your deduction is limited to your cost basis in the bitcoins, subject to a limit of 50% of your AGI.
- Any deduction that can’t be used in the year of donation because of the AGI limitations can be carried forward for up to five additional years.
Potential pitfall: gifts of bitcoins must adhere to the IRS’s qualified appraisal rules. If the value of your donation is $5,000 or more, you will need to secure an appraisal of your gift from a qualified appraiser with experience in appraising bitcoins. Given that Bitcoin is so new, you might have trouble finding a qualified appraiser.
When something new comes along, it can sometimes take time before it is widely understood, much less used. So it is with Bitcoin. But if acceptance and use spreads among donors and charities, Bitcoin’s potential in philanthropy will continue to grow.
Comments or feedback? Contact me on Twitter @juanros.