Bitcoin Creates Once-in-a-Lifetime Opportunity

If you have been paying attention, you know that over the past few months the price of Bitcoin has skyrocketed to all-time highs. This past January has seen the cryptocurrency blow past its previous record valuation of $20,000, set in December of 2017, to new highs of over $40,000 for a single coin.

Though highly volatile and speculative as investment vehicles, cryptocurrencies have been increasingly gaining acceptance in the mainstream, and are now drawing an inflow of cash from large, institutional investors and corporations. Even J.P. Morgan Chase, after overcoming initial skepticism by CEO Jamie Dimon, has gotten in on the action by creating their own blockchain-based digital currency, JPM Coin.

Meanwhile, investing in cryptocurrencies has never been easier for retail investors, as online platforms like Coinbase and Paypal make it possible to create a virtual wallet, link your bank account, and begin trading from an app on your phone. As a result, the rising tide of Bitcoin’s popularity has lifted other well-known cryptocurrencies, like Ethereum and Litecoin, to fresh highs as well.

Anyone who bought Bitcoin at its March 2020 low of $4,900 would be sitting on gains of over 700% only 10 months later. Even more astonishingly, anyone who invested $1 in Bitcoin on January 1, 2011 would be looking at mind-boggling gains of 13,159,100% 10 years later!

But of course, those gains do not account for Uncle Sam’s cut. As you would expect, regulators have taken note of the now trillion-dollar cryptocurrency market, and there would be astronomical tax burdens associated with cashing in on a windfall of that size.

Fortunately, in recent years the IRS has given guidance on the tax liabilities associated with the sale of cryptocurrencies. They state, “Virtual currency is treated as property, and general tax principles applicable to property transactions apply to transactions using virtual currency.”

o, what does this mean for someone who has been holding onto highly appreciated Bitcoin? It means that when they sell, they will be subject to the same capital gains tax rate that applies to the sale of stock, real estate, or any other security. You do not need to be a CPA to know that the tax bill on 700% gains is going to be quite significant.

That is of course, IF you sell. Savvy investors have increasingly been turning to another strategy to capture the value of their cryptocurrency gains, while also avoiding the large tax burdens associated with selling: donating it to charity. Because cryptocurrencies are governed by the same IRS rules as property, they also receive the same tax deduction when donated to charity, which has created a once in a lifetime giving opportunity for some donors. In 2017, during the height of the last Bitcoin price jump, The Catholic Foundation received and liquidated the first ever cryptocurrency donation in our history.

How does this work? In short, highly appreciated digital coins can be donated to the Foundation and sold by us so that the donor does not incur any capital gains liabilities. The Foundation then sells the cryptocurrency and places the entire proceeds into a Donor Advised Fund from which the donor can do their regular charitable giving over time, while also receiving a tax deduction for the value of the cryptocurrency on the day that they donate it.

Because cryptocurrencies use unique block-chain technology for verifying transactions, and because of their high price volatility, the value of the coins can change between the moment they are donated and when they are sold. If this is something that you are interested in, please contact The Catholic Foundation in advance so that we can work with you to ensure a smooth process for receiving and liquidating your donation.

Questions? Contact David Clark at dclark@catholic-foundation.org or 614-443-8893.