Watch for these pitfalls before donating crypto to charity

If you’re planning a gift to charity this holiday season, you could score a tax break by donating cryptocurrency. But there are some key things to know before making the transfer, experts say.

In 2024, there’s been a significant jump in crypto gifts to charity, according to Fidelity Charitable, which has accepted $688 million in crypto donations — mostly in bitcoin — through Nov. 19. By comparison, the public charity received $49 million in digital currency in all of 2023.

Donating crypto to charity is similar to giving other types of property. But “there are some pitfalls,” said certified financial planner Juan Ros, a partner at Forum Financial Management in Thousand Oaks, California. 

Since 2018, the higher standard deduction has made it harder to claim itemized tax breaks for charitable gifts, medical expenses, state and local taxes, among others. 

But if you itemize and can claim the charitable deduction, it’s generally better to donate profitable investments, such as cryptocurrency, rather than cash.

By donating crypto to charity, you can bypass capital gains taxes and claim a deduction based on its fair market value, assuming you’ve owned it for more than one year. The tax break has a cap of 30% of your adjusted gross income for public charities.

It’s an attractive strategy for crypto investors because bitcoin and other coins could be “the most highly appreciated asset in their portfolio,” said Kyle Casserino, vice president and charitable planning consultant for Fidelity Charitable.

The price of bitcoin was around $96,000 on Dec. 4, up by nearly 120% year-to-date, according to Coin Metrics.

However, donating crypto can be more complicated than assets like stock, experts say.

“Not every charity is willing or able to accept gifts of crypto,” so you’ll need to contact the organization first, Ros said.   

As of January, 56% of the biggest U.S. charities accepted cryptocurrency donations, according to The Giving Block, a platform for digital currency gifts and fundraising. That’s up from 49% the previous year.  

However, most large donor-advised funds are “well-equipped” to accept digital currency, Ros said.

Donor-advised funds are investment accounts that work like a charitable checkbook. The donor receives an upfront deduction and can transfer funds to eligible nonprofit organizations later. 

Typically, the donor-advised fund sells the crypto and reinvests the proceeds. But some allow investors to continue holding digital assets in the fund.

When you give a profitable investment owned for more than one year, your deduction is based on the fair market value of the asset.

That’s easy for publicly traded stock, but the IRS requires added documentation for digital assets worth more than $5,000, according to Andrew Gordon, a tax attorney, certified public accountant and president of Gordon Law Group.

“You’ve got to be able to support that deduction through the qualified appraisal,” which has specific IRS requirements, he said.

For example, you must file Form 8283 with your tax return and keep a copy of the appraisal. But if the donated assets exceed $500,000, you must include the appraisal with your return, according to the IRS.

You need to follow the IRS appraisal criteria “to the letter,” Ros explained. Otherwise, you could put your charitable deduction at risk in the event of an audit.