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When it comes to charitable giving, a Donor-Advised Fund (DAF) is one of the most tax-efficient vehicles available. DAFs allow donors to contribute various assets, receive an immediate tax deduction, and recommend grants to nonprofits over time. In fact, they are one of the fastest-growing charitable vehicles in the U.S., currently holding over $230 billion in assets. And, with the growing popularity of bitcoin, it’s no surprise that donor-advised funds are evolving to accept cryptocurrencies alongside traditional assets like cash and stocks.
But what makes a bitcoin Donor-Advised Fund (bitcoin DAF) unique? Let’s dive into the tax benefits of using a bitcoin DAF for charitable giving and how it can be an incredibly efficient way to reduce your taxable income while supporting the causes you care about.
A bitcoin donor-advised fund works much like a traditional DAF, but with a key difference: it allows you to donate bitcoin directly into the fund without it being converted to cash within the DAF. Typically, when you donate bitcoin to a charitable fund or organization, the bitcoin is sold and converted into cash to facilitate the donation. However, with a bitcoin DAF, your bitcoin remains securely stored on-chain in collaborative custody until you're ready to recommend a grant.
This setup is powered by Unchained Connections, which helps facilitate bitcoin donations without converting the bitcoin into cash. When you’re ready to make a grant, the nonprofit can receive your donation in bitcoin or USD, depending on their preference. This structure allows you to hold onto your bitcoin and benefit from its potential growth, all while maximizing your tax savings.
There are two primary tax benefits to donating bitcoin through a bitcoin donor-advised fund:
Just like traditional DAFs, when you contribute assets such as cash, stocks, or digital assets like bitcoin to a DAF, you receive an immediate tax deduction based on the fair market value of your donation (subject to certain limitations, such as Adjusted Gross Income (AGI) restrictions). This means you can reduce your taxable income for the year you make the donation, effectively lowering your tax bill for that period.
For example, if you purchase 1 bitcoin for $5,000 and it’s now worth $100,000, you can donate that bitcoin to a DAF and receive a tax deduction based on its current value ($100,000), not just the original $5,000 you paid for it. This gives you an immediate benefit, effectively lowering your taxable income - subject to AGI limitations.
The second major tax benefit comes when you avoid paying capital gains tax on the appreciation of your bitcoin. Let’s say you bought 1 bitcoin for $5,000, and now it’s worth $100,000. If you were to sell the bitcoin, you’d be subject to capital gains tax on the $95,000 profit. Depending on your tax bracket, this could be a significant tax liability.
However, by donating the bitcoin directly to a DAF, you avoid paying capital gains tax entirely. Even though you’re donating an asset that has appreciated in value, you won’t owe any capital gains tax on the $95,000 gain. This means your donation is far more efficient, as you can give the full value of your bitcoin to charity without the tax hit.
Furthermore, by donating your bitcoin with a low tax basis, you raise your cost basis on the remaining bitcoin you hold. This strategy can potentially reduce your future tax burden if you decide to sell or liquidate any of your remaining bitcoin holdings down the line.
A bitcoin Donor-Advised Fund allows you to offset taxes you might face from other large financial events, such as:
With a bitcoin DAF, you can effectively channel your appreciated assets into bitcoin earmarked for charities while minimizing your tax liabilities.
Donating bitcoin to a bitcoin donor-advised fund offers you an incredibly efficient way to support the causes you care about while maximizing the tax advantages available to you.
Not only can you reduce your taxable income and eliminate capital gains tax liabilities, but you can also watch the bitcoin grow over time, giving in the way that best suits your charitable goals. Additionally, bitcoin DAFs allow the nonprofits you care about to benefit from the growth of bitcoin even if those organizations don’t yet accept bitcoin directly. This flexibility ensures you can contribute to a wide variety of causes without worrying about how the receiving nonprofit can handle the donation.
In short, donating bitcoin through a bitcoin DAF can significantly reduce your taxable income to reduce capital gains tax liabilities, making it one of the most tax-efficient ways to give charitably. You’ll have the flexibility to hold your bitcoin, watch it grow, and give in the way that best suits both you and your chosen nonprofit.
For more details on how bitcoin Donor-Advised Funds can maximize your charitable giving, visit Unchained.com/Daf.
Tax benefits mentioned above are hypothetical and illustrative and assume relevant requirements of the Internal Revenue Code are met. This information is educational only and cannot be relied upon as tax advice, as it has not been catered to your individual tax circumstances. Unchained Capital Inc., Unchained Trading, LLC, and Bitcoin Collateral Services, LLC do not provide tax or legal advice, nor make representations regarding the tax consequences of any structure described herein. Please consult with your tax accountant, attorney, and/or licensed financial advisor if you need advice on these matters.
