Charities and cryptocurrency: Gifts are on the rise
As cryptocurrencies’ profiles rise in the marketplace, your clients are likely to begin asking questions about the possibility of using cryptocurrency holdings as part of their charitable giving plans. Interest in this technique has spiked in recent weeks, especially after the University of Pennsylvania’s announcement of a landmark $5 million gift of bitcoin to support the Wharton School’s Stevens Center for Innovation in Finance.
In many ways, advising clients about charitable gifts of cryptocurrency parallels the strategies you routinely use to advise clients about a gift of any highly-appreciated asset. For example, cryptocurrency gifts require documentation similar to what’s necessary to substantiate gifts of real estate, closely-held stock, and collectibles.
Furthermore:
In the case of cryptocurrency held by your client as an investment for more than one year, the rules for gifts of long-term capital gains assets apply. In this situation, the client's gift of cryptocurrency is valued at its fair market value at the time of the donation.
The receiving charity must sign your client’s IRS Form 8283 for your client to be eligible for the charitable deduction (unless the value of the gift is less than $500).
A qualified appraisal is required for gifts with a value greater than $5,000.
The recipient organization is required to file IRS Form 8282 if all or a portion of the cryptocurrency is sold or converted to cash within three years of the gift. As with gifts to charity of other appreciated assets, the charity does not pay tax on the gains.
The IRS has issued guidance for charitable gifts of cryptocurrency, including confirmation that the usual rules apply for a “contemporaneous written acknowledgment,” even though cryptocurrency is treated and reported by the charity as a non-cash gift.
The team at the community foundation is ready to assist you and your clients who may wish to donate cryptocurrency to a donor-advised fund or other type of fund. For example, we take care of establishing an account with Bitpay, Coinbase, or other third-party processor to receive the gift. After that, our team is responsible for converting the cryptocurrency to cash so that your client’s fund can be diversified to support the client’s charitable giving goals.
IRAs, field-of-interest funds, and designated funds: Don't overlook these powerful tools
Designated funds and field-of-interest funds may not always be top of mind when you are developing philanthropy plans for your clients and their families, but they are extremely valuable tools in certain circumstances and it’s important to be aware of what the terms mean.
A field-of-interest fund at the community foundation is established by your client for a charitable purpose described by your client. For example, a field-of-interest fund can be established to support research for rare diseases, to support organizations that assist homeless families in getting back on their feet, to enable art museums to acquire works that celebrate the region’s diversity, and so on. The knowledgeable team at the community foundation distributes grants from the field-of-interest fund according to the spending policy set by your client to further the client’s wishes. Your client selects the name of the fund, whether they wish to use their own name (e.g., Samuels Family Fund or Samuels Family Fund for the Arts), maintain anonymity (e.g., Maryville Fund for the Arts), or something else altogether (e.g., Bettering Our World Fund).
A designated fund at the community foundation is a good choice for a client who knows they want to support a particular charity or charities for multiple years. This is useful so that the distributions can be spread out over time to help with the charity or charities’ cash flow planning, enable your client to benefit from a larger charitable tax deduction in the current year when the client’s tax rates are high rather than spreading it out over future years when tax rate projections are lower, or both. The client specifies the charities to receive distributions according to a spending policy they select, and the client can choose a name for the fund.
Perhaps one of the most compelling reasons to encourage a retirement-age client to consider establishing a field-of-interest fund or a designated fund is to take advantage of the Qualified Charitable Distribution planning tool. As an advisor, you are well aware that clients who own Individual Retirement Accounts (IRAs) are required to take “Required Minimum Distributions” each year beginning at age 72, whether or not they need or want the income. These distributions often cause an increase in the client’s income taxes.
A Qualified Charitable Distribution permits a client to transfer up to $100,000 from an IRA to a qualified charity instead of taking a Required Minimum Distribution, thereby avoiding the income tax hit. Although the IRS does not permit Qualified Charitable Distributions to donor-advised funds, charities eligible to receive a client’s Qualified Charitable Distribution do include designated funds and field-of-interest funds at the community foundation.
International giving: Know your clients' options
Giving directly to international charities can involve a steep learning curve. Legal complexity no doubt was at play in the 2.2% (adjusted for inflation) decline in giving to international affairs in 2019, according to Giving USA. An example of one of the many legal issues with international giving is described in the recently-issued Private Letter Ruling 202119002 involving a domestic private foundation with board members who also serve on the board of the foreign organizations ultimately receiving grants from the domestic private foundation. The IRS decided that the domestic private foundation was not engaged in prohibited self-dealing in this particular case, but the IRS’s discussion in the ruling itself illustrates the complexity of supporting international charities.
The rules surrounding charitable gifts to international causes have been a rollercoaster ride for many years, especially with the expansion of anti-terrorism and foreign investment regulations. A glimmer of hope emerged in September 2017, when the Internal Revenue Service released Revenue Procedure 2017-53, allowing practitioners to at least be able to rely on safe harbor guidance that applies not only to international grants by private foundations, but also to distributions from donor-advised funds at the community foundation.
The team at the community foundation can help you and your clients navigate the options for international giving, ranging from compliance with so-called “expenditure responsibility” to “foreign public charity equivalency.” In most cases, though, we help you and your client find a domestic charitable organization--recognized under Section 501(c)(3) of the Internal Revenue Code--that works internationally to address the causes your client cares about. Carrying out global grant making in this way through a donor-advised fund helps avoid the pitfalls that your clients might encounter using a private foundation or going it alone.