How Charitable Deductions Can Generate Estate Tax

How Charitable Deductions Can Generate Estate TaxThe head of the planned giving program is often requested by the head of development and/or finance to estimate the organization’s share of a deceased supporter’s estate. Usually, the executor or legal counsel is cooperative in providing a rough estimate of any residuary shares. Before communicating a number, the planned giving officer needs to understand how any “soft” or “hard” estimate was calculated.

So imagine your charity and another are respectively the 25% and 75% beneficiaries of the residuary estate consisting entirely of a real estate holding company. The estate’s lawyer informs you that the entire holding company is valued at $1,000,000 on the federal estate tax return. Your charity’s interest is easily determined to be $250,000, one-fourth of the value. Correct? Maybe or maybe not! While the full value of the property is includable in the gross estate because no restrictions are on the shares at death, the estate tax charitable deduction will be less than the full value. How can that be?

Estate of Warne v. Commissioner1 reminds charities the value of their shares must reflect discounts for lack of marketability and control.

At the time of Miriam Warne’s passing in February of 2014, she left shares in Royal Gardens of 75% to her family foundation and the remaining 25% to her church. The Tax Court redetermined the value for gift and estate purposes and upheld the IRS’s determination that a discount should be applied for the property and split 75% and 25% between charitable donees. The taxpayer unsuccessfully argued that discounts were inapplicable since the entire business interest passed to charity. The Tax Court disagreed, seeing the gifts as two separate transfers to two distinct charities with discounting required.2

The court ruled that the estate could only deduct the discounted interests received by the church and family foundation. The church’s interest was discounted approximately 27% for a minority interest and lack of marketability. The family foundation’s interest was only 4%. The discount was modest because the operating agreement covering the business provided significant power to unilaterally dissolve the business.

Broader Impact of Estate of Warne

While this case revolved around the amount of the charitable deduction, its implication reaches the marital deduction. A planned giving officer might review an estate plan with the unified credit amount in trust to a surviving spouse with any excess to charity and conclude no federal estate tax will be owed. That will not be the case, because of the need for discounting for any illiquid and/or minority interests in the property. For your philanthropic donors intending to provide a business interest to charity, care should be taken to avoid the division of the business into majority and minority interests. Failure to do so may mean your charity could be receiving less than its pro rata share in a business.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 


Endnotes

1. Estate of Warne v. Commissioner, T.C. Memo. 2021-17

2. The Tax Court in Warne relied on the reasoning of Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir. 1981). Specifically the Warne court at page 53 said: “The valuation of these same sorts of assets for the purpose of the charitable deduction, however, is subject to the principle that the testator may only be allowed a deduction for estate tax purposes for what is actually received by the charity—a principle required by the purpose of the charitable deduction. In short, when valuing charitable contributions, we do not value what an estate contributed; we value what the charitable organizations receive.” See Ahmanson Foundation at pp. 765-766, 768.

 

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Digital Marketing’s Place in a Planned Giving Program

Digital Marketing’s Place in a Planned Giving ProgramSharpe Group has been studying donor communications strategies for over 50 years. We know that a multi-channel marketing approach is necessary to effectively communicate with distinct age groups who may have different ways of getting information. We also know that more “touches” with a wider variety of communications mediums can improve overall engagement and is the best way to nurture a diverse donor base. The most successful donor marketing strategies speak to the right groups at the right times and with the right tools. Digital marketing is important when connecting with younger donors, but it should not be the only source of outreach. Here are three ways that digital marketing is best suited in a planned giving program.

1. Planned giving websites

A planned giving website is one way to connect with your donors and advisors. Your site can be a valuable donor communication tool with carefully researched articles and interactive tools to help your donors make gift planning decisions. Your planned giving website should be integrated with your overall gift planning program in ways that maximize cross-marketing opportunities. Your website should be easy to navigate, and your contact information should be easily accessible. The main purpose of your planned giving site is to inspire others to connect with your mission, become familiar with planned giving opportunities and encourage them to contact you with any questions.

2. eNewsletters

eNewsletters are a great way to see more engagement on your gift planning website. While we know that print provides a clear advantage when communicating with older donors, eNewsletters will take your vital news and messaging into a digital platform that can reach more of your donor base and reduce overall mailing costs. Potential donors looking for more information can follow their interest onto your planned giving website. Your marketing campaigns will foster more engagement if you speak to your donors through the platforms they are comfortable with and provide ongoing inbound traffic to your planned giving website.

3. Digital booklets

Digital booklets that include a variety of gift planning topics, such as wills and bequests, charitable gift annuities, retirement plans, trusts and gifts of life insurance and real estate will help donors understand up-to-date information on gift structures that may encourage them to give more. Digital booklets can reach a wide variety of donors. Sending out these informational pieces will help younger donors learn about the different options of giving in the future.

It is important to keep all donors in mind when you are considering your marketing strategy, but make sure your marketing efforts are being used to the best of their ability by focusing on age. Studies show that the best way to reach older donors who are 70+ is through printed materials, but we cannot forget about the younger donors between the ages of 45 to 65 who may prefer digital over printed. It is essential to research and gather demographic data such as age, gender, marital status and wealth in order to maximize the results of your marketing efforts.

By Jana Lawyer, Senior Consultant

 

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Digital Marketing’s Place in a Planned Giving Program

Looking the Gift Horse in the Mouth

For many years, charities have lobbied to allow assets held in IRAs to be a source of funds for remainder trusts and gift annuities. They may be on the cusp of achieving this goal.

HR 2954 Securing a Strong Retirement Act of 2021 will directly—and perhaps indirectly—impact charitable giving of donors 70.5 and older. As discussed in my previous post, Sec. 309 provides a “one-time election for qualified charitable distribution up to $50,000 to split-interest entity” that includes remainder trusts and gift annuities. Distributions from a split-interest arrangement to the annuitant will be fully taxable because of the inapplicability of the tier accounting and recovery of basis rules.

Let’s examine how these new rules reduce the after-tax flow from the gift annuities Here, we assume a 71-year-old donor who is willing to accept a 5% payout from both a gift annuity and unitrust.

Securing a Strong Retirement Act QCDs From a CGA or CRUT by 71yo Tables

In light of the above analysis, some rules of thumb might be:

  1. Gift annuities funded with assets other than QCDs will result in more cash flow to the donor because of the ability to receive tax-free returns of principal during the donor’s lifetime. QCDs funding gift annuities provide less spendable income. The QCD might be the funding asset of last resort for the charitably inclined.
  2. Charitable unitrusts funded with assets other than QCDs might result in more cash flow to the donor depending on the ability of the trust to generate preferentially taxed qualified dividends. Funding a unitrust with a QCD prevents any such possibility. Whatever advantage might be possible through a conventionally funded unitrust would be reduced by the annual administrative expenses to a small trust ($50,000 or less).
  3. Charitable annuity trusts are not a viable option in the current very low Sec. 7520 interest rate environment because of failing the probability of exhaustion test.

In addition to reducing the after-tax cash flow from a charitable gift annuity, the Act has other provisions which could have the unintended effect of making the QCDs less attractive.

Over the next ten years, Sec. 105 of the Act would phase in an increase in the age for a required mandatory distribution from 72 to 75.

Sec. 107 would permit higher catchup amounts of up to $10,000 at ages 62, 63 and 64.

Sec. 202 would repeal the current 25% limit on qualified longevity annuity contracts. This means an account balance up to $135,000 will be permitted with a delayed distribution date to age 85, which may disincentivize QCDs as a way of reducing RMDs.

The net effect of these provisions would be larger amounts to defer to a later year of drawdown while permitting greater additions and extension of deferral.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

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One of the Family: Including Pets in Estate Plans

One of the Family: Including Pets in Estate PlansAccording to recent estimates, 67% of U.S. households—some 85 million families—own pets. Last year, Americans spent almost $100 billion on their pets for everything from food and toys to veterinary care. When you consider these statistics and the fact that pets are often considered important members of the family, it is no surprise they are often included in the overall estate planning process.

As you are reminding your donors about taking care of those they care for in their estate plans, don’t forget to include ideas for how they can take care of their pets after their lifetimes.

From a legal standpoint, pets are considered property, so people can’t legally leave a bequest to a pet in their will or living trust. There are a few alternatives, however, to provide for the care of their pet after their lifetime.

  1. The pet trust
  2. This is a trust created to provide for pets, including the funds needed to meet their needs. In it, a person can name or recommend a specific caretaker for their pet or direct their trustee to make this decision. A pet trust allows a person to include information about the care of their pet (see #3). The pet owner will need to set aside funds to pay for the costs of the trust and the care of their pet. They can provide the funds now or in their will or living trust. Though pet trusts are more costly to set up, they provide more protection. It is best to consult an attorney, as exact details vary by state.

  3. A less costly alternative–the Pet Protection Agreement
  4. This is a legally enforceable agreement between two individuals or entities (the pet parent and the pet guardian). With a Pet Protection Agreement, a person can make a gift to their pet’s caretaker on the condition that they care for the pet. If this is not done, the funds must be returned to the person’s estate or sent elsewhere as directed in their estate plan. An animal rescue or animal welfare group may also be able to accept responsibility for finding a good home for the pet, particularly if the costs to do so are provided. These agreements are valid in all states.

  5. Put it in writing
  6. Regardless of which avenue is chosen, it’s important to document how the pet should be cared for. What do they like to eat? What are their sleeping and play habits? Identify food brands, treats and toys they prefer. What types of medications do they need? Who is their groomer? What veterinary practice do you use? These instructions can be specified in a person’s will or living trust, to be used by the pet’s caregiver in the future.

  7. Leave the leftovers to charity
  8. If a person sets aside funds to care for their pet in a formal trust or through their will, they can name a charity to receive anything remaining after their pet’s lifetime. Reminding your donors your organization is happy to be last in line may just result in a future bequest.

By Ashley McHugh, Sharpe Group Content Director

For more information about pet ownership and your donors, read “Providing for Pets in Estate Plans.”

 

Caring for Our Four-Legged Loved Ones

One of the Family: Including Pets in Estate Plans

Pets are very dear to us and have a special place in our hearts, so it is important to make sure they are provided for as part of our estate plans. Your donors may feel the same way but may be uncertain how to ensure continued care for their pets.

Use Sharpe Group’s “Caring for Our Four-Legged Loved Ones” brochure to educate donors on how their estate plans can be structured to support their animals and, eventually, your mission. You can add your overall branding to this printed piece with your choice of image and accent colors and the ability to use a four-color logo.

Click here to learn more about ordering personalized brochures.

 

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Continuing the Legacy, Crafting the Vision

Continuing the Legacy, Crafting the VisionFor the past couple of weeks since I joined the Sharpe Group team, I have been immersing myself in Sharpe’s mission, vision and history. And what a history! The more I learn, the more honored I am to be a part of this team.

Sharpe Group, soon to be 60 years strong, was founded by Bob Sharpe Sr., a forward-thinking individual who is credited with coining the term “planned giving.” The Sharpe Group team continues Bob’s legacy by dedicating our experience to helping nonprofits of all sizes and missions aid their donors in structuring and blending current and deferred gifts that are most advantageous for the charity as well as the donor.

It’s a daunting mantle to take, for sure. But I am confident that Sharpe Group’s future is as bright as its legacy. Sharpe Group has teams across the country dedicated to working with our nonprofit clients to bring leading-edge strategies for ensuring short-term growth and long-term sustainability. Many of the tools developed by Sharpe Group are specifically designed to deliver strategic insights into donor information as well as tactical and easy-to-use tools and resources to deliver results.

As we emerge from COVID, look for Sharpe Group to introduce new and exciting tools that will harness the power of artificial intelligence to examine complex data and predictive analytical tools to deliver powerful development strategies.

We are also expanding our suite of digital technology and communication tools.

Today, more than ever, our clients rely on Sharpe Group to deliver valuable insights and strategies along with the next generation of mission-critical tools to ensure that our nonprofit clients continue to raise more and larger gifts.

By Eric Eilertsen, Sharpe Group President
 

Sharpe Group editor Grant Miller spoke with Eric about his new position and his vision for Sharpe Group’s future. Read the interview here.

 
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Generosity Shines Bright Through the Pandemic

Generosity Shines Bright Through the PandemicThe past year has been unlike any other. During a global pandemic that has taken the lives of nearly 600,000 Americans, many in the U.S. have lost their jobs (some permanently), and the economy has been uncertain for most of 2020 and into 2021.

COVID-19 has also impacted charitable giving and estate planning but not in the way some would expect. While it’s true such factors as an increase in health care costs and longer life expectancy influence estate planning, the pandemic has caused many to feel more vulnerable, and it has reinforced their outlook that these uncertainties of life accelerate a need for estate planning. More people than ever are taking the time to make or update their plans.

According to a TD Wealth survey, a shift in priorities, including accelerated interest in estate planning, resulted in “the need for a long-term estate and financial plan in the event of uncertainty.” And in this time of more awareness of estate plans, this past year has been surprisingly favorable toward philanthropy, according to their survey.

In addition to highlighting the importance of reviewing estate plans on an ongoing basis, the pandemic has also brought about a renewed commitment to taking care of loved ones and giving to charity.

During the pandemic, we have heard stories of neighbors volunteering to help those in need and strangers performing random acts of kindness. Many are continuing their support of a broad array of causes, even making larger charitable gifts in light of the current environment. As 2021 progresses, with the rollout of COVID-19 vaccines accelerating and new cases declining, there seems to be a light at the end of the tunnel.

As you begin to make your plans for end-of-year marketing, reminding your donors of the many ways to support your mission will be more important than ever. Traditional messaging of tax-wise ways to give before Dec. 31 (e.g. cash, noncash gifts, QCDs, etc.) should be reinforced with the many ways to include your organization in estate plans (e.g. bequests, beneficiary designations, life income plans).

If your organization is interested in starting or enhancing your planned giving efforts, consider having a Planned Giving Program Assessment performed to guide you toward the most efficient and successful strategy possible.

By John Ryan, Sharpe Group Senior Editor

 

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The Coming Expanded Availability of QCDs? Worthy of Investigation? YES, but … Unanswered Questions

Expanded Availability of Qualified Charitable DistributionThroughout the remainder of the year, there will be ongoing discussions of major changes to the income and transfer tax systems, including the incentives to charitable giving. One piece of legislation gaining bipartisan support is HR 2954 Securing a Strong Retirement Act of 2021.1 Section 309 would provide a “One-Time Election for Qualified Charitable Distribution to Split-Interest Entity” which is defined as charitable gift annuities, unitrusts and annuity trusts within the meaning of the Code plus additional requirements.

Section 309 would add subparagraph (F) to sec. 408(d)(8) imposing the following requirements:

First, there must not be an election for a preceding year. In other words, the election can be made only once.

Second, the aggregate amount of the distributions subject to the election may not exceed $50,000.

Third, a distribution is a Qualified Charitable Distribution to the extent it is otherwise deductible, ignoring the AGI limitations otherwise imposed by sec. 170.

EXAMPLE: Let’s assume a donor (age 71) uses $50K from an IRA to fund a charitable gift annuity paying 5% for her lifetime. The present value of the remainder interest turns out to be $19,318. The remaining $30,682 is considered ordinary income. The same limitation would also apply to charitable gift unitrusts and annuity trusts.2

Under these assumptions, not only is there no tax deduction, but part of the distribution will be taxable, unlike an outright qualified charitable distribution.

Fourth, the measuring life of the income interest can only be the account owner, the spouse of the account owner or both. There will be no possibility to utilize the split-interest arrangement to extend deferral for the benefit of a child or grandchild.

Fifth, the split-interest entity must be exclusively funded with the qualified charitable distribution. Time will tell if there is a “market” to administer remainder trusts with such a comparatively small sum of funds. A charitable gift annuity must have a minimum payout rate of 5% and commence payments within a year.3

Sixth, the income interest must be nonassignable. Additionally, in determining the taxability of payments from the charitable remainder trust and gift annuity, the regular tier accounting and sec. 72 recovery of basis rules do not apply. The result will make all of the payments from the gift annuity fully taxable from the first payment. For remainder trusts, all the payments should be taxed as ordinary income.

The proposed effective date of these changes would be for all distributions made in the tax years ending after the date of enactment. If this way of giving is of interest, then the account holder must be prepared to act quickly.

If enacted, sec. 309 would bring a measure of parity for split-interest gifts and outright QCDs. The exclusion of distributions from AGI will limit the taxability of Social Security benefits, limit exposure to the 3.8% net investment income tax and improve the chances of deductibility of unreimbursed medical expenses and the deductibility of up to $25,000 in passive activity losses.

As I read the proposed legislative language, some questions arise. Can a donor make an outright QCD and a split-interest QCD in the same year? I am not seeing an explicit prohibition, but clarification is welcomed. If two different types of QCDs can be made in the same year, is the maximum $150,000 or $100,000?

Just as the IRS provided guidance for QCDs,4 this provision will need similar guidance. Hopefully, it will permit pledges to be satisfied with a split-interest QCD without violating the self-dealing prohibited transaction rules.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 


1. See https://www.congress.gov/bill/117th-congress/house-bill/2954/text for a copy of the proposed legislation.

2. See section 309 adding sec. 408(d)(8)(v) which will require ignoring the tier accounting rules for remainder trusts and the recovery of basis rules for gift annuities.

3. The proposed legislation imposes a minimum payout rate presently higher than the minimum ACGA-suggested rate of 4.8%. See https://www.acga-web.org/current-gift-annuity-rates.

4. Notice 2007-7, 2007-5 IRB 395.

 

Making Retirement Accounts Less Taxing

This personalized brochure outlines ways those who are 70½ or older can enjoy the benefits of tax-free IRA gifts, featuring multiple examples. Our online ordering platform allows you to add your overall branding to this printed piece with your choice of images and accent colors and the ability to use a four-color logo.

For more information, click here or contact one of our Sharpe Group Consultants.

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Marketing Charitable Gift Annuities

Marketing Charitable Gift AnnuitiesThough offering gift annuities is not appropriate for every charitable organization, gift annuities make a lot of sense for organizations with larger numbers of loyal donors in an older demographic.

While working in an organization with a substantial nationwide charitable gift annuity program (with more than 5,000 contracts at any one time), I learned the importance of continually encouraging gift annuity contributions to make up for annuitants who “matured to glory.” With more contracts and a larger investment pool, an organization can better spread risks associated with the commitment to make annuity payments for the lifetimes of all the annuitants.

As part of a comprehensive gift planning operation, the organization’s gift annuity program had been in place long before I showed up. The first time I personally compiled and mailed a gift annuity proposal (illustration and cover letter), I used $10,000 as the gift amount. A completed CGA application form arrived back with a check for $50,000. It seemed like gift annuities sold themselves.

This was the result of our organization’s ability to continually and successfully reach existing and potential gift annuity donors through marketing efforts. These days, as I work with CGA-issuing client organizations on newsletters and other gift planning promotions, I regularly encourage including at least a reminder that CGAs are available.

From experience, I also think a good deal of fundraising success can come from brief and clear cover letters. No word salad and no hyperbole.

During my gift planning days, this clarity extended into my role of managing our state CGA registrations and reviewing marketing materials. Our organization hadn’t been immune to the technique of comparing gift annuities to certificates of deposit. Fortunately, we were involved with the American Council on Gift Annuities. This and other resources, like the Charitable Giving Tax Service, helped inform adjustments we made to our program from time to time.

I still think about the 2009 Mid-America Foundation decision (Warfield v. Bestgen), where a U.S. Court of Appeals noted that Mid-America Foundation’s promotional materials emphasized tax savings and the opportunity for financial gain and income generation. While this organization’s “CGA” offering became widely regarded as a Ponzi scheme that was not legitimately charitable, the appellate court case alerted many in our sector to concerns about using gift annuity marketing language that could be construed as offering investments subject to regulation under federal securities law.

At the time, I even advised my organization that ensuring “lifetime stream of income” might be something to move away from, as the court had specifically drawn attention to it. I suggested referring instead to “lifetime annuity payments.” It’s a subtle distinction, and I don’t think “stream of income” is the worst thing to say, though it also isn’t necessary to say it.

The appeals court described problematic language used by Mid-America Foundation. Among phrases and sentiments that still seem obvious as those to avoid are “attractive returns,” “amount you deposit,” “current average net-yield” and “to get this same return through the stock market, [the hypothetical investor] would have had to find investments that pay dividends of 19.3%! …. The rate of return on a Mid-America Foundation ‘Gift Annuity’ is hard to beat!”

Given the structure of a charitable gift annuity, it’s easy to get caught up in promoting the fact that someone is getting something back as a return on investment. After all, the broader fundraising community, and donors themselves, sometimes refer to any particular contribution as an “investment” in the organization. Still, that doesn’t give charitable organizations license to market “investments.” I think we always have to remember that what we’re promoting are intrinsic rewards that come from making charitable contributions.

The main things to remember:

  1. Regularly promote your gift annuity program.
  2. Promote gifts, not investments.

by Laura Knitt, J.D., Sharpe Group Senior Consultant

Sharpe Group Charitable Gift Annuity Publications

Marketing charitable gift annuitiesSharpe Group has two publications to help you communicate the benefits of gift annuities to your donors. Both of these printed materials are designed to fit into a #10 envelope and can include your organization’s logo and contact information. These publications are also available with or without the American Council on Gift Annuities single-life rates printed on the back.

Marketing charitable gift annuities“Giving Through Gift Annuities” is a 16-page booklet offering a thorough discussion of the role gift annuities can play in retirement planning and providing for loved ones. This booklet can include your organization’s logo and contact information on the front and back panels.

A more concise offering, “Questions & Answers About Gift Annuities” is a brochure which allows you to add your overall branding to the printed piece with your choice of images and accent colors and the ability to use a four-color logo.

For more information, click here or contact one of our Sharpe Group Consultants.

 

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Ensuring Better Relations Between Development Professionals and Financial Advisors

 Better Relations Between Development Professionals and AdvisorsFrom my observations, the members of a gift planning team most likely to clash are the development professional and the investment advisor.

From the development professional’s perspective, the advisors treat philanthropy as a product to be marketed and sold with insufficient understanding of a donor’s philanthropic objectives. Gifts are often “presented” to the charity as “done deals” with little or no input from legal or tax counsel. Gifts structured through abusive techniques, such as “charitable split-dollar,” can be the result when the “product” is, in fact, not about philanthropy. Other times, legitimate techniques are diluted when charitable remainder trusts are designed with high payout rates barely meeting the 10% residuum requirement. Even a simple charitable gift annuity can be complicated by funding through an intermediary charity controlled by a financial institution.

From the advisor’s perspective, the charity’s development office is not grateful for such gifts from donors who “weren’t even on the radar.” Like any professional, advisors do not appreciate being asked to “waive their fees and commissions,” especially when they have no affiliation or relationship with the institutions.

What can each do to earn the cooperation of the other? Both parties should be laser-focused on meeting the philanthropic goals of the client and should avoid trying to control the planning process and, by extension, the donor. Err on the side of simplicity when considering the structure of the gift and the asset funding it. Over the years, I have seen the establishment of charitable remainder trusts by donors who did not need the income and life insurance programs whose premiums did not “vanish.” Both the donor and the charities would have been better served if development professionals and advisors had collaborated on the gift’s structure. Whenever possible, the development professional should help advisors understand the philanthropic motivations of their supporters.

When each party focuses on charitable intent with full disclosure of risks of certain techniques, conflict will be minimized.

By Professor Christopher P. Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

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What About Bitcoin?

donating bitcoinCharities are learning that digital currency, like bitcoin, opens a new giving opportunity for donors. Understanding it may help open the door for future gifts. Yet to understand digital assets and currency, we should review some basics:

  • Money is anything that can be exchanged for something of equal value, such as barter transactions, gold, silver, paper currencies (fiat), etc. We use different forms of money regularly.
  • Value is based on scarcity (i.e., supply and demand), where a scarce asset (i.e., gold) has greater value than one less scarce (i.e., silver). Open markets set the fair market values.
  • Digital assets are part of our daily lives and include software, phone applications, music, photos, digital files with passwords (zip files, PDFs, spreadsheets, etc.) and bank and brokerage statements. All have ownership or represent ownership.
  • Digital currency includes the use of cards (credit, debit, gift, etc.), phone charges, Apple Pay, online charges, etc. We use digital currencies every day.

So, what about Bitcoin?

  • A bitcoin is a block of secure data (digital asset) and is treated like money (currency) and was started in early 2009.
  • Ownership of bitcoins is processed by a decentralized public ledger called a blockchain.
  • A bitcoin’s value is based on its market value as conducted between peers on the blockchain.
  • Transactions on the blockchain between owners of bitcoin are completed without third-party participation or interference (no banks, central banks or government entities). No government controls bitcoin nor its value nor the transactions.
  • Bitcoin is unique among digital currencies because it has a limited supply of 21 million, so its market value may increase over time.
  • Other fiat and digital currencies–with no limit on their supply or which are not backed by any hard asset (such as gold)—may lose their purchasing power (value) over time.

A charity can open an account on an exchange (such as CoinBase [COIN], BlockFi, BitPay, BitStamp, etc.) to receive the gift of ownership of a bitcoin or any other digital currency and then sell it for cash (dollars) less transaction fees. A charity may wish to promote such gifts on websites and emails, with a link offering instructions on how to complete the gift.

The IRS offers the following guidance on virtual currency transactions:

In 2014, the IRS issued Notice 2014-21, 2014-16 I.R.B. 938 PDF, explaining that virtual currency is treated as property for federal income tax purposes and providing examples of how longstanding tax principles applicable to transactions involving property apply to virtual currency.

If you receive cryptocurrency in a peer-to-peer transaction or some other transaction not facilitated by a cryptocurrency exchange, the fair market value of the cryptocurrency is determined as of the date and time the transaction is recorded on the distributed ledger or would have been recorded on the ledger if it had been an on-chain transaction.

If a donor donates virtual currency to a charitable organization described in Internal Revenue Code Section 170(c), they will not recognize income, gain or loss from the donation. For more information on charitable contributions, see Publication 526, Charitable Contributions.

Visit Frequently Asked Questions on Virtual Currency Transactions for more information.

By Lewis von Herrmann, Sharpe Group Senior Consultant

 

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