A significant number of people have invested in bitcoin, a popular type of virtual currency. As their investments have grown, so has public interest in using this type of currency for all purposes. As virtual currency becomes more mainstream, churches need to be aware of how to handle virtual currency donations concerning federal tax laws.
Accepting Virtual Currency Donations
Although they are not required to accept donations of virtual currency, churches should have a way to accept these donations as this form of asset increases in popularity. They can establish a wallet, or the equivalent of an account for virtual currency, either directly, through a cryptocurrency exchange, or through some securities brokerage platforms that deal in cryptocurrency. This process can be the most challenging part of churches accepting virtual currency.
Another approach is for the church to contract with a donor-advised fund as a sponsoring organization, which can convert the currency to cash for the church. Still another option is to contract with a third-party donation processer, which sets up a button on the church’s website for cryptocurrency donations, and once they are received, converts them to cash for the use of the church.
Tax Consequences of Virtual Currency Donations
Capital Gains Tax
The Internal Revenue Service (IRS) classifies virtual currency as noncash property. As a result, if a person purchases virtual currency and later sells it at an increased value, the taxpayer will pay capital gains tax on the increase in value. However, if the taxpayer donates the virtual currency, the increase in value is not taxable as capital gains for the taxpayer. Furthermore, as long it is a 501(c)(3) nonprofit organization, the church does not pay tax on capital gains, either. As a result, neither the donor taxpayer nor the church will pay capital gains tax on any appreciation in value.
Charitable Tax Deductions
The donor taxpayer also may be entitled to a tax deduction for the donation, just as it would for any other donation to the charity. Of course, the amount of the deduction will vary according to the individual circumstances of each taxpayer. However, suppose the donor held the virtual currency for more than one year before donating it. In that case, they could be eligible to deduct the total fair market value of the currency at the time of donation without having paid any capital gains tax.
Donations Valued at $5,000 or More
Donations of cryptocurrency valued at $5,000 or more or that add up to $5,000 or more over a single calendar year are subject to IRS substantiation requirements. These are the exact substantiation requirements that generally apply to noncash property, excluding automobiles, boats, and airplanes, which have separate rules. The donor must take the following steps to substantiate these donations if they intend to use them as deductions for charitable contributions:
- Obtain a written appraisal of the cryptocurrency dated no more than 60 days before the donation, but no later than the date of the donor’s tax return and prepared by a qualified appraiser:
- who has a professional designation, or
- met specific education and experience requirements, and
- who is not the donor, the church receiving the donation, or an employee of the church
- Obtain a contemporaneous written acknowledgment of the donation from the church on the earlier of the date that the donor files their tax return or the date that the tax return is due, and
- A statement that no goods or services were received in exchange for the donation, or
- If goods or services were received, a good faith estimate of their value and a disclosure that the donor may deduct as a charitable contribution only that amount donated that is more than the value of the goods or services received in exchange
- Submit IRS Form 8283 with their federal income tax return, with Section B completed and signed by the appraiser and the church that received the donation, along with their addresses and tax identification numbers
- Maintain specific records concerning the cryptocurrency and donation, including the acknowledgment from the donor, the information in Section B of Form 8283, and a copy of the qualified appraisal
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