Donations in crypto are on the rise and this has implications for charitable tax deductions.
The largest grantmaker in the US saw a 12x increase in donations in crypto to $331 million 2021, compared to $28 million in 2020.
Donor-advised funds offer an efficient way for crypto or cash charitable giving, so amid their rise in popularity, understanding them is essential for anyone involved in modern philanthropy.
The material in this guest post is for informational purposes only and is not intended to be tax, financial, accounting, legal, or investment advice. Read more articles on crypto and taxes.
12x increase in charitable donations made in crypto
In recent years, the world of charitable giving has experienced a significant shift, with donor-advised funds (DAFs) taking center stage. These unique financial vehicles have garnered attention for their versatility and efficiency. Fidelity Charitable, the nation’s largest grantmaker, witnessed a nearly 12X increase in cryptocurrency donations in 2021. This substantial growth, driven primarily by Bitcoin and Ethereum contributions, underscores the transformative potential of digital assets in fueling charitable endeavors.
Through DAFs, Fidelity Charitable received $331 million in digital assets in 2021, compared to $28 million in 2020. This exponential rise highlights the growing acceptance and utilization of cryptocurrencies as a means of supporting philanthropic causes.
Taxation within the realm of cryptocurrency is complex. Founders and crypto holders who receive tokens as compensation often face significant tax obligations due to the volatility and potential for rapid appreciation of these assets. Therefore, efficient tax strategies become a priority for these individuals, helping them meet tax obligations and maximizing their philanthropic impact.
What is a Donor-Advised Fund?
In the charitable world, donor-advised funds (DAFs) stand out as an innovative giving mechanism. Sponsored by public charities or community trusts, they are akin to personalized charitable savings accounts. A donor contributes assets to the DAF, enjoying an immediate tax deduction. Over time, the donor can then make grant suggestions, directing funds to nonprofits of their preference.
Why Donor-Advised Funds are Gaining Traction?
DAFs have become increasingly appealing and gaining traction because:
Immediate Tax Benefits: As soon as a donation is made to a DAF, donors can claim a federal income tax deduction.
Tax-Free Growth: As these funds grow without being taxed, they accumulate and provide a larger pot for eventual charitable causes.
Unparalleled Convenience: DAFs allow donors to streamline their charitable activities. No longer do they need to keep track of numerous receipts or make multiple donations. It’s a one-stop-shop for philanthropic endeavors.
Crypto and Donor-Advised Funds
Let’s visualize this with an example. Imagine being deeply invested in wildlife conservation. Rather than donating individually to numerous conservation groups, you opt to create a DAF account with an organization that sponsors such funds. You initiate with a tax-deductible contribution, which can range from crypto to cash to stocks. The DAF invests your contribution, enabling it to grow tax-free. As time goes on, you advise your DAF on which conservation groups should receive grants and how much they should get. The brilliance of DAFs lies in the minimized paperwork – you handle it once at inception, and then your primary role is advisory.
Donor-Advised Funds vs. Private Foundations: A Brief Comparison
While private foundations are also a favorite for charitable activities, there are stark contrasts:
Operational Ease: Unlike foundations, which require intensive administrative efforts and may be subject to excise taxes, DAFs are inherently more straightforward and economical.
Mandatory Distributions: Foundations need to disburse at least 5% of their assets annually. In contrast, DAFs lack this obligatory distribution, allowing donors more flexibility.
Maintaining Donor Anonymity: If discretion is a priority, DAFs hold an edge. They can grant donors more privacy compared to foundations.
Tax Deduction Limits: A Crucial Nuance of Donor-Advised Funds
An essential aspect to consider when exploring DAFs are the tax deduction limits. For cash contributions to a DAF, donors can deduct up to 60% of their adjusted gross income (AGI). However, for contributions of appreciated assets, such as stocks or real estate, the limit is 30% of AGI. If a donor’s contributions in a given year exceed these limits, they can carry forward the excess deduction for up to five subsequent years.
It’s this favorable tax treatment, especially when donating appreciated assets, that makes DAFs an attractive vehicle for many philanthropists. Not only does the donor avoid capital gains tax on the asset’s sale, but they also receive a deduction based on the full market value of the donated asset. This dual tax advantage amplifies the impact of their charitable intent, making their contributions stretch even further.
The Growing Significance of Donor-Advised Funds in Philanthropy
DAFs have undeniably stamped their mark on contemporary philanthropy. The National Philanthropic Trust, in its 2019 DAF report, revealed a staggering contribution exceeding $37 billion to DAFs. Their user-friendliness combined with tax perks and strategic giving solutions has elevated DAFs as a primary tool in the charitable realm.
A Balanced Perspective: Addressing the Criticisms
It’s crucial to address the critiques alongside the praises. Some observers argue that DAFs enable money to be “sidelined.” The essence of this critique is that with the lack of a mandatory distribution, funds in DAFs might not reach deserving charities promptly. This flexibility, while beneficial to donors, could inadvertently delay funds from addressing immediate and pressing societal challenges.
As we navigate the evolving landscape of charitable giving, DAFs have unique properties: innovation, flexibility, and efficiency, and are largely underutilized by crypto holders. Whether you’re a potential donor, crypto founder, or someone passionate about philanthropy, grasping the nuances of DAFs becomes pivotal. They represent not just a tool for donation but a reflection of modern, strategic, and thoughtful philanthropy.
The material in this guest post is for informational purposes only and is not intended to be tax, financial, accounting, legal, or investment advice.