The IRS is Lazy … and That Helps Bitcoin Donors

IMG_3674

By William Digges

What’s the first thing big government does when something new is invented? Tax it.  The IRS loves nothing more than to categorize wealth as taxable.  The IRS is also scared of technology.  I’m not just saying this because Uncle Sam’s taxmen are using 13-year-old outdated, unsupported Windows XP software.[1]  Nor is it because the IRS writes code in an obsolete COBOL programming language from JFK’s times for mission-critical applications.[2]  No, the IRS fears technology so much it refuses to think about proper ways to tax Bitcoin, a “digital currency” that exists only on the internet but has real value.  Rather than propose an addendum to the tax code, the IRS classifies Bitcoin as property, akin to stocks and real estate.  This harms the day-to-day benefit of Bitcoin but boosts its philanthropic potential.

Many financial advisors see Bitcoin and its unique characteristics as a very useful means of philanthropic work.  Laura Saunders, a specialist on taxes at the Wall Street Journal, writes, “The American Institute of CPAs sent the IRS a letter this month requesting clarifications on…donating digital currencies to charity”.  Pensco Trust Company is another wealth manager that accepts Bitcoin in its IRAs and trusts.  Fidelity Charitable allows Bitcoin to fill their donor-advised funds.[3]   Fidelity’s website provides infographics on donating though a donor-advised fund.  Several of the “tax advantages” are

  • donors minimize their capital gains tax exposure,
  • charities receive up to 20% more, compared to self-traded assets,
  • donors enjoy a tax deduction,
  • and donors pay no fees for trading and processing.[4]

Sounds like a good deal to me.

Fidelity Charitable’s Bitcoin-specific website offers an example of how someone used Bitcoin to increase the value of his donation and his donor reach.  Back when Bitcoin traded at around $100 a coin, “Alex” owned 400 Bitcoin worth $40,000.  But in 2015 when he wanted to donate to a lymphoma charity he realized that a coin was worth around $400.  That meant a much higher capital gains tax would reduce his donor power if he traded the Bitcoin for U.S. dollars.  But by cutting out the middle man and pledging his Bitcoin directly to a donor-advised fund, “Alex” avoided all capital gains tax.  This in turn raised the power of the donation from $131,440 to $160,000.  It also reduced his tax obligation by another $63,360.[5]  With the additional remaining funds, the donor was not only able to increase his support to the original charity; he was also able to grant a gift to his alma mater.  In the world of Bitcoin, everyone benefits.

Bitcoin should be considered a sort of “Swiss army currency.”  It could be used to donate to charity, or buy falafel from down the street.  Its gradual increase in value can be a source of wealth, yet it is near fully liquid.  Like real estate and the stock market, it accumulates value through speculation, but at the same time it can be used to buy anything on Amazon, or in several brick and mortar stores.  If the IRS can properly adopt and implement a virtual currency section in the tax code, then the use of Bitcoin will expand, with more physical stores accepting it.  For now, its greatest value lies in philanthropy and amazon.com.

IMG_3677

[1] Willis, Gerri. “IRS Using 13-Yr. Old Microsoft Software.” Fox Business. N.p., 2015. Web. June 27th 2016

[2] Sahadi, Jeanne. “IRS Says It’s Using Technology from JFK’s Time.” CNNMoney. Cable News Network, 3 Feb. 2015. Web. 27 June 2016.

[3] Saunders, Laura. “The Latest Bitcoin Hurdle: How to Tax It.” WSJ. Wall Street Journal, 24 June 2016. Web. 27 June 2016.

[4]http://www.fidelitycharitable.org/giving-account/what-you-can-donate.shtml

[5]http://www.fidelitycharitable.org/docs/ContributingBitcoin.pdf

 

Share this post!