Investors can’t be blamed for being nervous about filing their 2022 tax returns, especially after recent actions taken by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission(CFTC), and Internal Revenue Service(IRS).

Even experts in the crypto industry can find it confusing. If there was confusion regarding the need to pay tax on your crypto investments in 2020, the IRS will add it to the front of form 1040. Many taxpayers are worried about reporting their crypto taxes accurately.

Adam Nash, co-founder and CEO at Daffy.org is a platform that allows charitable donations.

The IRS taxes most crypto transactions, even though there is some disagreement between the SEC, CFTC and other regulators on how to regulate cryptocurrencies. If you have sold, spent, earned, or staked cryptocurrency, you will need to declare your gains and losses.

It’s no surprise that, in the absence of a 1099 form (accountant speak – the form on which you report gains and losses for traders), many crypto investors are anxious about possible tax issues. The IRS has more money, so even honest mistakes are punishable by a higher penalty.

There is, however, a way to avoid the tax issues associated with crypto transactions. This involves making charitable contributions.

You can donate crypto that you have held for over a year and has appreciated in price. You will not have to pay capital gains tax and you can take advantage of one of most generous deductions available in the tax code.


Understanding Crypto and Taxes

According to IRS guidelines crypto and other digital asset are classified as property, like stock and cryptocurrency transactions are taxed on capital gains. Crypto that has appreciated in value for less than a year is subject to short-term capital gain tax. This is the same as income taxes. Crypto held for over a year and increasing in value qualifies as “long term” which offers lower tax rates.

When it comes to giving assets, the length of time that you’ve held them is important. The IRS has different rules when it comes to assets held for a short time compared to those that are long-term.

  • Donating crypto that you have held for less than one year: The IRS will limit your deduction if you hold the crypto asset for less than one year. Donating assets such as stock or crypto held for less than one year is not a good idea. You would not be able to claim the capital loss if it was below your original purchase price. If the price is higher than your purchase, you will lose the capital gain.
  • Donating crypto you’ve held longer than a calendar year: The IRS will consider the donation value as the fair market value at the time of the asset. The IRS does not consider the price you paid, but the fair market value.

Donating appreciated crypto could result in the taxpayer saving money and the charity receiving more funds. The charitable deduction, one of the largest in the tax code allows taxpayers to donate assets worth up to 30% their AGI in any given year.


Big savings

An example is sometimes helpful when it comes to crypto-taxes. Imagine that a couple with an annual adjusted gross income of $250,000 bought a bitcoin (BTC), in February 2020, for $10,000 and decided to sell it for $30,000 in April 2023.

In California, for example, a couple who earns $250,000 may be taxed at a federal rate of 15% for long-term gains, plus a California tax rate of 9.3%, totaling 24.3%. The couple who bought BTC for $10,000, held it for over a year and sold it for $30 would have to pay a total tax of $4,860 on a gain of $20,000. This leaves them with a gain after taxes of $15,140.

They could also reduce their tax bill by donating proceeds from the sale. If the couple’s total tax rate is 33.3% (24.3% federal and 9.3% California state), they could donate $15,140 in cash to receive a $5,041 tax deduction.

The numbers will be much better for the couple and the charities that they support if the bitcoin is donated directly. The couple could deduct $30,000.00 from their income by donating 1 BTC worth $30,000.00 to charity. This would save the couple $9,990 at their tax rate of 33.3%.

They would have had to pay capital gains tax on the bitcoin if they sold it. The amount was $14,850. The couple who donated twice wins because (1) they get a deduction for their larger donation and (2) they don’t have to pay any capital gains tax on the appreciation of the bitcoin.

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Here is the incredible part: the charity also wins! If the couple had donated the proceeds, they could only donate $15,140. In the second case, the couple gave a bitcoin valued at $30,000. The couple gets the full value of the $30,000 gift, since the non-profit does not pay any taxes.


Please be aware that this article is intended for educational purposes and not as tax advice. Calculations are meant to be indicative and do not represent all the possible complexities in individual tax returns. Please consult a tax expert to assess your particular tax situation.