Donor-Advised Funds
If you’re invested in crypto, you know that big swings in your portfolio value are part of the game. In the moments when things are way up, it’s important to manage your assets carefully in order to minimize your tax burden. Along with tools like trusts and tax-optimized retirement accounts, donor-advised funds are an incredible way to minimize your tax obligations and make a long-term commitment to the causes you care about most.
What is a donor-advised fund?
Donor-advised funds (DAFs) are the fastest growing philanthropic vehicles in the United States. Since 2017, the number of DAFs has grown 27% year-over-year, and now accounts for more than 12% of giving according to the National Philanthropic Trust.
From a tax perspective, DAF contributions are treated the same way as any other non-cash donation to a nonprofit. In the eyes of the IRS, crypto is taxed as property. This means that if you donate crypto, or contribute it to a donor-advised fund, you can claim a deduction equal to the market value of the assets at the time of donation. Plus, donating the crypto before converting it to cash avoids creating a capital gain liability.
The main difference between donating crypto directly and contributing it to a DAF is that you can keep the assets invested in the portfolio of your choice (depending on the policy of the sponsoring 501c3) and make a decision on where to issue grants anytime in the future. This means your DAF account can continue to grow tax-free and you can make a bigger impact down the line.
It’s important to note that you only receive a tax benefit at the time of a contribution to a DAF. Also, DAF contributions are irrevocable and are under legal custody of the sponsoring nonprofit. Like the name implies, as a donor, you have advisory privileges on how the funds are managed.
Based on all of the above, you can see that DAFs are particularly useful when sitting on vastly appreciated assets. You can fund the DAF, get a tax benefit for that calendar year, and decide on when and where to give later on.
What are the donor-advised fund deduction limits?
Unfortunately, donor-advised funds can’t be used to reduce your tax obligation down to zero, as there are limits on the amount that can be deducted. For cash contributions, you can deduct up to 60% of your Adjusted Gross Income (AGI) for cash contributions to a DAF. For contributions of cryptocurrencies like Bitcoin and Ethereum that have been held for more than a year, you can deduct up to 30% of your AGI.
Let’s use a simple example for a crypto donor:
AGI:$200,000
Maximum Deduction Limit for Cryptocurrency Contributions:30% of AGI
Maximum Deductible Amount: $100,000×0.3=$60,000
If you contribute cryptocurrency worth $60,000 to a DAF, you could potentially lower your taxable income to $140,000 for that year, assuming no other deductions. (Learn more about donor-advised fund deduction limits.)
Legacy planning with your donor-advised fund
One of the best parts about donor-advised funds is that you can manage the investments and grants from your funds for the rest of your life, and leave them in the hands of your children or other inheritance once you pass on.
When you are contributing crypto, cash, stock, private equity shares, or any other assets, donor-advised funds are an effective way to manage your portfolio and create a legacy of impact.
