Cryptocurrency and donor-advised funds: Talk to clients about donating digital currency

Interest in cryptocurrency has gained serious momentum in 2021. As waves of new retail investors join established institutions in evolving their investment strategies, your clients with crypto holdings may welcome ways to leverage their cryptocurrency gains and offset the tax implications.

Contributing cryptocurrency to a donor-advised fund (DAF) has become a popular strategy to strategically realize your clients’ charitable vision. With a global crypto market cap of more than $1.5 trillion, there are compelling reasons why philanthropic individuals are converting these digital assets for charitable giving.

At your next meeting with clients who express a strong interest in philanthropy, consider discussing ways to optimize their charitable giving by donating appreciated crypto with a DAF.

Identify client opportunities

More than 21.2 million adults, or about 14% of the U.S population, own cryptocurrency, according to crypto exchange Gemini. What’s more, a significant portion of the population say they intend to purchase crypto soon. Though the study indicates a shift to more widespread adoption among all demographic sectors, currently 75% of crypto holders surveyed are male and in their late 30s, with an income just north of $100,000 a year. Cryptocurrency investors are actively engaged in their financial future, advocate passionately for increased usage, and are amenable to innovation and new ideas. 

As you begin discussions about the 2022 tax season, there may be opportunity to review client portfolios and broader financial strategies and tactics.

Demystify the process of donating crypto to a DAF

DAF sponsors offer years of experience in quickly and efficiently liquidating complicated non-cash assets for charitable use through an easy and streamlined system engineered to save your clients time and hassle. Though specific details on structures and protocols vary by DAF sponsor, the process is generally straightforward. Use the following steps to demystify the process for your clients:

1. The donor answers questions about the acquisition of the asset and signs an affidavit. 
2. The DAF sponsor provides a dedicated digital wallet address for transfer.  
3. The cryptocurrency transfer is initiated. 
4. Once transferred, the DAF sponsor liquidates the crypto as soon as possible. 
5. Proceeds in U.S. dollars are available for grantmaking. 

Review the pros and cons of donating non-cash assets

Many DAFs can convert cryptocurrency, real estate, private business interests, hedge fund and private equity assets, limited partnerships or other unique assets into philanthropic capital. Leveraging cryptocurrency and other non-cash assets provides the potential for several positive goals for your clients as well as the charitable organizations or causes they support, including:

• Clients can avoid capital gains tax on assets held longer than a year and may be able to deduct the fair market value of the contribution from their federal income taxes up to 30% of adjusted gross income. 
• DAF donors can use one large donation to support numerous charities simultaneously or spread recurring donations throughout the year.  
• DAF investment strategies for contributions allow your charitable dollars to potentially grow over time and support philanthropic causes for years to come.  Impact investment options provide the opportunity for donors to increase social good and philanthropic capital growth. 
• Nonprofits in need of support — especially small or growing charities — may not have the tools to accept non-cash assets like cryptocurrency directly. DAF donors can clear such hurdles and get mission-critical support flowing faster. 

Cryptocurrencies seem poised to continue their integration into the mainstream through greater awareness, increased acceptance in the market, and adoption of more sophisticated technology. At the same time, the desire for a more in-depth and sophisticated method of charitable giving is growing stronger among philanthropists using DAFs.
Savvy advisors can build stronger client relationships by initiating open discussions about how to use cryptocurrency and other non-cash assets charitably, boosting the effectiveness and impact of your client’s charitable giving.