Donating to a charity
If you are considering donating to a charity and are also a crypto enthusiast, you can create substantial savings for yourself while donating by leveraging your crypto assets. The future is now.
Can I donate with cryptocurrency?
With the historic rise of cryptocurrency as an asset class, many charities are making it easier and easier to donate with cryptocurrency. Most charities will want you to donate with ‘blue chip’ cryptocurrencies, such as Bitcoin or Ethereum as they are considered the least volatile, or crypto with the most long-term potential, in a constantly changing market.
It’s important to note that only Canadian charities registered with the CRA can accept donations in the form of cryptocurrency. We are likely to see most charities in Canada allow cryptocurrency donations, even if they don’t believe in cryptocurrency themselves, as we have seen great philanthropy in recent years coming from crypto ‘Whales’, as it is a great way to give value anonymously and help charities without the government intervening. Also, donating cryptocurrency means the transactions are available for all to see on the blockchain. In the future, we may see charities operating solely on the blockchain, so donors can see exactly where their money is being spent.
Charities will either choose to HODL your cryptocurrency donation, or instantly sell it for it’s fair market value so your donation can be put to good use.
Will I be taxed when I donate cryptocurrency
The Canadian Revenue Agency (CRA) stated they treat crypto taxation on a case by case basis. In Canada, it is completely tax deductible to donate your cryptocurrency to a registered charity. Not only will you be helping your favorite charity, you will be able to reduce your tax liability on the way.
Unlike the US, Canada has no short or long term donation rules, meaning your entire fair market value of the donation will be tax deductible if you qualify for the Charitable Donations Tax Credit.
When donating, ask your charity if they can provide you with a receipt for your donation, which will allow you to claim the amount as a deduction of your tax liability. Although it is likely to be updated in the future, the CRA has not stated that all donations will be an allowable write-off, meaning you may end up paying some capital gains tax on your donated cryptocurrency.
Like most other countries, CRA treats most crypto taxation as capital gains. The good news is, the CRA only requires investors to pay capital gains tax on HALF of their net capital gain annually. Taxable events include:
- Crypto-to-Crypto trades
- Crypto to Canadian Dollar
- Using crypto to pay for services
- Gifting Cryptocurrency
Remember, you only pay capital gains tax on the gain, not the entire sales value. You can calculate your gain by taking your cost basis away from the total sales revenue.
In 2019, George buy’s 1 Ethereum (ETH) for $1,000. This is now his cost basis, inclusive of any fees paid to acquire the crypto.
Six months later George decides to donate the Ethereum to his favorite registered charity as the price has increased to $2,000.
George can now claim $2,000 to the CRA as an allowable donation expense
When should I donate my cryptocurrency?
As seen in the example above, the timing of your cryptocurrency donation is crucial, but ensuring you are donating cryptocurrency assets that have appreciated is even more important.
Although donating depreciated cryptocurrency will still be eligible as a charitable donation, you will be losing the massive benefits of tax-loss harvesting that comes with depreciated crypto assets in particular.
To ensure you receive maximum benefit from your donation, you should focus on only donating appreciated crypto assets.
Donate your cryptocurrency when you would have sold it yourself.
Although charities have the option of holding onto your crypto donation, it is most likely they will sell the crypto as soon as possible. They will do this not only to lock in the value of your donation, but to reduce the massive volatility that the cryptomarkets have. As a charity, you do not want to be speculating on money that will go to a great cause. For this reason, it is advised to donate your cryptocurrency when you would have sold your cryptocurrency yourself. This way, when the charity sells the cryptocurrency for fiat, they will receive, in your eyes, the maximum benefit. Of course, donating something is better than nothing, so remember that the perfect time may never and you may need to donate during a certain tax year.
Donate your appreciated cryptocurrency during a high-income year.
Having mentioned the benefits of donating appreciated cryptocurrency, choosing to donate in a year you expect to make a lot of regular income, putting you in a higher tax bracket, is the most efficient use of your donation. Due to the progressive tax system, income in higher bands gets taxed heavily. Ensuring you use your charitable donation to have your other income taxed at a lower rate is crucial for having an efficient tax plan.
Reporting your cryptocurrency Donations to the CRA
There is no threshold of crypto donation that requires you to inform the CRA, meaning you must report all donations to registered Canadian charities when donating cryptocurrency. You must include the fair market value of the crypto that you donated at the time of donation, as well as stating the type of cryptocurrency that was donated, such as Ethereum (ETH) or Solana (SOL).
So, is cryptocurrency worth donating? Like any donation, you must ensure you have the extra income to spare to complete your donation, but it is a great way to reduce your overall tax liability, especially if you are a high income earner, and have made a lot of gains over the tax year with your cryptocurrency.
Donating is always a great act of care, just ensure you are being tax efficient so both parties win.
Disclaimer: CRAs relationship with Cryptocurrency
Although CRA continues to slowly create guidelines for Canadians investing in cryptocurrency, they are still way behind several other developed countries when it comes to the rules surrounding taxation. Many DeFi protocols, such as yield farming and staking are yet to receive proper guidance from CRA. We should expect to see the number of guidelines rapidly increase as Canadian investors call for them but until then, crypto investors have to take positions that may or may not be accepted by CRA.
*Opinions are for discussion purposes only. This does not represent the views of MetaCounts Cashflow Inc. or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.