Ethereum and Bitcoin Donations: Tax Deductions and Receipts
As a volunteer at a tax-exempt organization in the US, you are probably familiar with the complexities of accepting and processing cryptocurrency donations. One of the most frequently asked questions is whether these donations are tax-deductible and whether a receipt is required.
Tax-Exempt Donations: Understanding Bitcoin Donations
Generally, donations to tax-exempt organizations in the US are tax-deductible under Section 501(c)(3) of the Internal Revenue Code (IRC). This means that donors can claim a charitable deduction on their tax returns for contributions they make to qualified organizations. However, cryptocurrency donations are a relatively new and complex area of tax law.
Section 170 Donations: The Traditional Rule
2014 The IRS has issued guidance (Notice 2015-56) that clarifies that Section 170 (Charitable Trusts and Gifts) applies to certain types of charitable contributions, including cryptocurrency contributions. Under this rule, donors may deduct their cryptocurrency donation as a qualified charitable contribution if they meet specific requirements:
- The donor must be a tax-exempt organization.
- The donor must have held the cryptocurrency for at least 12 months before making the cryptocurrency donation.
- The donor must itemize deductions on Schedule A of Form 1040.
Bitcoin Donation Rule: Special Notes
In response to the growing public interest in cryptocurrency and charitable giving, the IRS has issued additional guidance (Notice 2019-41) regarding the taxation of cryptocurrency donations. Under this rule:
- Donors can deduct their cryptocurrency donation as a qualified charitable contribution.
- The donor must have held the cryptocurrency for at least one year prior to making the donation.
- The donor must maintain records of the cryptocurrency, including its fair market value.
Issuing Receipts
While donors are not required to issue receipts for cryptocurrency donations, it is essential that your organization provides documentation and acknowledges it in various ways. Some options include:
- Thank You Letters: Send a thank you letter or confirmation email to the donor acknowledging that you have received the donation.
- Digital Receipt
: Create a digital receipt that can be shared with the donor via email or on an online portal.
- Charitable Deduction Statement: Include a statement on Form 8288 (Non-Cash Charitable Contributions) indicating that you have taken a charitable deduction for your cryptocurrency contribution.
Consequences of Not Providing Receipts
Failure to provide receipts or provide documentation in accordance with IRS rules may result in penalties, fines, and audits. Additionally, donors may not be able to claim their donation as a qualified charitable contribution if they are not properly acknowledged.
Best Practices for Giving Bitcoin Donations: A Step-by-Step Guide
- Understand Your Organization’s Policies: Review your organization’s cryptocurrency donation guidelines to ensure you are in compliance with IRS rules.
- Determine the Type of Donation: Decide whether the donor can deduct their cryptocurrency contribution as a qualified charitable deduction under Section 170 or the Bitcoin Donation Rule.
- Maintain Records: Maintain accurate and complete records of the cryptocurrency transaction, including the fair market value and any documentation provided to the donor.
- Issue Receipts: Create a receipt containing basic information (e.g. recipient name, organization name, date) and provide it to the donor.
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