The implications of receiving cryptocurrency donations on tax returns have been increasingly recognized over the past five years.
According to a news article published by the Crypto Council for Innovation, donor-advised funds (DAFs) have emerged as a prominent method of charitable donation for donors nationwide. The popularity of these charitable funds is attributed to their efficiency and versatility. Sponsored by public charities, DAFs function akin to personalized charitable savings accounts. When a donor contributes to a DAF, they are eligible for immediate tax deductions and can allocate the funds to their preferred nonprofits. The advantage for nonprofits lies in the fact that these funds grow at a tax-free rate within the account, thereby ensuring that charities receive a larger share of the funding.
There are significant differences between donor-advised funds and private foundations. Foundations are obligated to distribute at least 5% of their assets annually, whereas DAFs do not have any such distribution requirements. Furthermore, DAFs offer greater anonymity to donors compared to foundations. As stated by Fidelity Charitable, donations can be invested in a DAF for tax-free growth with the guidance of a financial advisor. However, with a DAF, it is not permissible to recommend grants that provide personal benefits to oneself or family members. Moreover, these funds can only be directed towards IRS-qualified 501(c)(3) organizations.
In 2021 alone, Fidelity Charitable reported receiving $331 million in digital assets via DAFs. This marked a twelvefold increase in crypto charitable donations compared to 2020. The news article warns that individuals who accept cryptocurrency may face substantial tax obligations due to the volatility of this form of currency. Tax deduction limits must also be considered when using a DAF; donors can deduct up to 60% of their adjusted gross income with cash donations and up to 30% with stocks and real estate donations. In 2019 alone, contributions exceeding $37 billion were received by DAF accounts.
