Over the past few years, digital currency has earned the reputation for being the easiest and most efficient way to move money across international borders. Experts say the ability to accelerate the flow of money at a reduced cost, along with the fear of surveillance and the impact of war on the local currency are the primary reasons why Ukrainian government officials recently began requesting donations in cryptocurrency.
Over the past month, wallets for Bitcoin, Ethereum, and the Stablecoin Tether were posted on Twitter and validated as authentic, and donations started rolling in for Ukrainian humanitarian causes. A number of other non-government organizations also began soliciting donations in cryptocurrency to support these needs. As of this writing, tracked cryptocurrency donations to Ukraine have reached $108 million.
If you’ve already donated cryptocurrency to Ukraine or any foreign country or are considering making a donation, it’s important to understand the tax implications and potential risks involved.
Tax Implications of Donating Cryptocurrency and Ear-marking Donations
A cryptocurrency donation should be recorded at its fair market value at the time of the donation. The exchange used to facilitate the donation will have this information, although different exchanges may have different values.
When giving to a nonprofit, whether in cryptocurrency or cash, avoid specifically identifying a recipient of your contribution (i.e., a specific individual or family). Such donations are considered agency transactions and as such would not be tax deductible. However, the nonprofit may provide a donor with information regarding families in need as part of its humanitarian efforts. Such donations to this cause would be tax deductible. This was a common scenario following 9/11; if people requested that their gift go to a specific firefighter’s family, such contributions were not considered tax deductible, but if donations were ear-marked for families of firefighters by the organization, the donation could be deducted.
When donating cryptocurrency, donate the tokens with the most appreciation to realize the greatest tax benefit. Cryptocurrency is similar to stocks in this regard. Suppose you purchased Bitcoin 10 years ago for $1 and bought more last week for $100. By donating the Bitcoin, you previously purchased for $1 which is worth $100 today, you can claim a tax deduction for the $99 in appreciation and avoid paying tax on that growth.
If you choose to exchange your cryptocurrency into cash prior to making the donation, please note that you could realize a taxable capital gain on the sale of the cryptocurrency. Using the
example earlier, if you were to convert Bitcoin that had a tax basis of $1 into $100 U.S. dollars and then donate the $100 to a qualified charity, you would receive the $100 charitable deduction but would also have a $99 gain which would be subject to capital gains tax.
Also keep in mind that not all nonprofits are capable of accepting cryptocurrency; the organization must have a system in place to receive cryptocurrency and distribute it accordingly.
Tax Implications of Donating to Foreign Organizations
When you donate directly to a foreign government, overseas nonprofit organization, or any organization that is a non-qualified U.S. charity, the donation is not tax deductible for U.S. tax purposes. You can certainly make the donation, but you will not receive a charitable contribution deduction. If you donate to a qualified U.S. charity as listed on the IRS website, and that organization distributes the funds to a nonprofit in Ukraine for humanitarian relief, your gift would be considered tax deductible.
Beware of Scams and Fraud
Please be cautious when making any charitable donations as there can be bad actors who try to exploit a crisis by creating organizations that pretend to be charities and while keeping donations for themselves. The situation in Ukraine is no exception.
There are many legitimate nonprofits in Ukraine that are currently soliciting donations for humanitarian efforts, but it can be extremely difficult to discern the legitimacy of an organization outside the U.S. and validate an organization’s status during times of crisis. Caution and care should also be taken to ensure you are not unknowingly donating to an entity designated as terrorist organization. As always, perform due diligence before making a charitable donation to any organization, whether U.S.- based, in Ukraine, or in another country.
While we encourage you to continue to support humanitarian efforts and global causes as you see fit, it is important to be aware of possible tax implications when making donations in cryptocurrency or to foreign organizations. If you are considering making a cryptocurrency donation to Ukrainian humanitarian efforts and have questions as to the possible tax implications of your donation, please feel free to contact us for assistance.