With all the moaning and complaining about the impact of the recent IRS statement on the tax-ability of bitcoin, most have overlooked one good outcome of this clarification. One that hopefully will unleash even more philanthropy in our bitcoin community.
Under current IRS guidance, dispositions (sales and spendings) of bitcoin are a taxable event. Bitcoin is property and when it's sold or spent, an individual must calculate the gain or loss on that transaction and report it as a capital gain or loss on his/her Federal Income Tax filing.
Except for this: Bitcoin that has been held for more than a year and gone up in value can be donated to a recognized charity without having to report any taxable gain to the IRS; what's more, one can take a deduction for its full market value at the time of donation. Donations of appreciated bitcoin held a year or less are still deductible, but their gains in value must also be recognized (and taxed).
This often overlooked fact turns a significant negative into a strong positive. Don't sell or spend profitable long-term holdings of bitcoin. Inasmuch as you can, donate them to charity and buy yourself a double tax break with your generosity.
There is a long section on Contributions of Property found here:
http://www.irs.gov/publications/p526/ar02.html#en_US_2013_publink1000229703Here you'll find more specific information in the sections Giving Property That Has Increased in Value -- Ordinary Income Property & Capital Gain Property:
http://www.irs.gov/publications/p526/ar02.html#en_US_2013_publink1000229755The IRS Guidance Summary is here:
http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-GuidanceExample: Let's say in 2014 you have taxable income of $100k and thus you were in a 25% marginal tax bracket; and you itemize deductions on Schedule A. You have $3000 worth bitcoin (present value) to sell/spend or donate; for those coins, you paid $1000 more than a year before.
If you sell or spend those bitcoin, you will pay $300-560 in Federal taxes ($2000 gain X 15-28%), depending on what tax rate is applied. And you might also pay state income taxes; at say 5%, that's another $100.
If you donate the $3000 worth of bitcoin to a charity, you pay no Federal or state tax, and you pick up a tax benefit of $750 in the Sch A deduction of $3000; that is, $3000 X 25%.
References: See what T. Rowe Price and Fidelity have to say about this strategy.
http://programforgiving.org/charitable/pages/donatingAppreciatedAssets.jsp http://www.fidelitycharitable.org/giving-strategies/tax-estate-planning/appreciated-securities.shtmlOk, so I do a bunch of work, spend a gazillion dollars to gain a ton of Bitcoins and then give them all away so I don't have to pay taxes?
