April 02, 2019, | AtoZ Markets - In this file, we will briefly explain how the US cryptocurrency taxation on holding and donating cryptos goes.
Starting from the basics, holding cryptocurrency only is not subject to taxation- in technical terms, holding cryptos would not give rise to a taxable event, but may still be subject to tax-reporting requirements, provided that those digital assets were held in a foreign financial account, and obligatory financial limits were met under Foreign Bank Account Report (FBAR) and Foreign Account Tax Compliance Act (FATCA) reporting requirements.
As for 2018, if a taxpayer has not sold his cryptocurrencies, exchanged or donated them by the end of the previous year, then this does not rise a taxable event to report to the U.S tax return.
Foreign Bank Account Report (FBAR)
The FBAR outlines that a taxpayer with a financial interest in or signatory authority over a foreign financial account must file a foreign bank account report (FBAR) FinCEN Form 114 if the total value of the foreign financial account exceeds $10,000 at any time during the calendar year.
Penalties for noncompliance ranges between $10,000 for non-willful failure, and willful failure to comply can fall under the greater of $100,000 or 50 percent of the amount in the account.
Foreign Account Tax Compliance Act (FATCA)
the FATCA outlines that a taxpayer with foreign financial assets of $50,000 or more must report it for FATCA purposes on Form 8938.
It is recommended that cryptocurrency-invested hedge fund accounts and cryptocurrency-denominated exchange accounts be reported in the summary information in Part I of Form 8938.
In Part V. specific information may be available. Noncompliance with FATCA could subject a taxpayer to taxes, severe penalties in excess of the unreported foreign assets, in addition to the exclusion from accessing U.S. markets, which could include a regulated cryptocurrency derivatives clearing market.
Donating cryptos to charities
A taxpayer can donate their cryptos to tax code Section 501(c)(3) tax-exempt charity of their choice, but donations over $500 fall under “noncash donations”, and should comply with the IRS appraisal requirements, after filing Form 8283.
Donations by US individuals will be treated then as “tax deductible”, as follows:
- Holding cryptocurrency as a capital asset for over a year, allows the donor to deduct the fair market value of the gift up to 30 percent of their adjusted gross income (AGI).
- Holding the cryptocurrency as a capital asset for a short term (less than one calendar year) or as ordinary income property, allows the donor to deduct the lesser of cost basis, or fair market value up to 50 percent of their AGI.
- Receiving the cryptocurrencies as payment for services rendered, allows the donor to claim a deduction of the fair market value on the date of receipt.
Note: the deduction on charitable contributions are not carried out in the ongoing year. They can be carried forward for five years, due to the fact that they exceed the taxpayer’s AGI limitation.