The US Internal Revenue Service (IRS) has committed to cracking down on bitcoin users that may have been evading paying taxes. However, there is still time to make charitable donations to your favorite charities and thereby give a little less to the tax man.
Year-End Tax Planning
For federal tax purposes, the IRS treats bitcoin as property, not currency. Taxpayers are required to report all bitcoin-related income, whether it be from wages, gifts, mining or investments. While some bitcoin income may go undetected by the IRS, exchanges such as Coinbase are required to report all bitcoin transactions to the agency.
Tax planning at year-end can save taxpayers a substantial amount of money. Among the various methods to reduce tax obligations is to make tax-deductible donations to charities. Many nonprofits now accept bitcoin donations such as BitGive, and United Way, Save the Children, and Greenpeace. However, before donating, make sure that the organization is an IRS-approved nonprofit. Otherwise, the agency can void your tax deduction and slap you with penalties as well as the taxes owed.
Bitcoins Held Long-Term: Maximum Deductions
Bitcoins held over a year are considered long-term holdings by the IRS. Tax attorney Elizabeth Prehn with Moskowitz LLP explained on Virtual Currency Today that “Bitcoins held for over a year can be donated directly to charity without having to pay any capital gains tax.” In addition, she said:
The donor also gets to write off the full fair market value of the virtual currency, up to 30 percent of his or her adjusted gross income.
With bitcoin price at its all-time high recently, tax deductions could make a difference for your overall tax strategy.
Bitcoins Held Short-Term
Bitcoins held for less than a year are considered short-term holdings by the IRS. Taxpayers cannot write off the full market value of each bitcoin in this case.
If short-term held bitcoins are donated directly to charities, “only the lesser of their cost basis or their present value can be deducted,” Prehn said. For example, bitcoiners who purchased bitcoins in January at $450 may be able to only write off that amount, rather than the current price of over $950 at press time.
For those who want to donate bitcoins held short-term, Prehn suggested:
In most cases involving bitcoins held short-term, it is generally best to first convert the bitcoins to U.S. dollars and then donate the cash to a qualifying charity. This way, you pay short-term capital gains when the virtual currency is sold, but you can then write off the entire amount of the donation.
Of course, in most cases, not selling your bitcoins at all may be the best option to avoid paying the IRS in general.
Disclaimer: This article is for informational purpose only and should not be used a a replacement for professional tax advice.
Are you planning to donate some bitcoins to charities for tax purposes? Let us know in the comments section below.
Images courtesy of Shutterstock, IRS, Moskowitz LLP
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The post Still Time to Make Bitcoin Donations and Give Less to the IRS appeared first on Bitcoin News.
Still Time to Make Bitcoin Donations and Give Less to the IRS