Considerations Before Donating Bitcoin

Consider before donating Bitcoin

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Donating to charity, projects, Bitcoin Circular Economies or content creators is a great way to make a difference and encourage particular behaviour with the help of Bitcoin. It can help people in need, support important causes, or help someone create something unique that doesn’t yet have a business model or monetisation angle, as is the case with many open-source software projects.

When you donate, you are not just giving money away. You are also investing in something you believe in, which will provide a return for others or indirectly benefit you. 

Bitcoin can be donated to charity like other assets such as stocks and business interests; the difference is with Bitcoin, you can easily send money to any organisation anywhere in the world. Donating Bitcoin to charity can be an excellent way for holders to maximise their social impact on the charitable causes of their choice while claiming tax benefits on their donation. 

Considerations when donating to a charity

If you plan on donating to a charity or NPO that accepts Bitcoin, consider the following before parting with your satoshis

  • The charity’s mission and goals. What does the charity do? What are its goals? Are they aligned with your values?
  • The charity’s track record. How long has the charity been in operation? What has it accomplished? Are there any complaints or negative reviews about the charity?
  • The charity’s financials. How much of each donation goes to the charity’s programs? How much is spent on overhead?
  • The charity’s transparency. Is the charity open about its finances and operations? Does it make its financial statements available to the public?
  • Your own personal connection to the cause. Are you passionate about the charity’s mission? Do you have a personal connection to the cause?
  • The sustainablity of the charity or project. While it feels good to give and to support a noble cause, the truth is many projects are NGMI and flushing money down the toilet is not going to stop that eventuality. If you’re donating with a purpose, you’ll want to look at how much impact the project makes in its field and if they’re looking into ways of using the donations to generate other forms of income, instead of only relying on annual donations and possible price apprciation of Bitcoin.

Considerations when donating to an open-source project

Donating to open-source projects is another way to support the Bitcoin ecosystem; plenty of developers are working on useful software we can all enjoy for free, and if you like what they do, why not show your support?

When you donate to an open-source project, you have no control or say in how the funds are used, so they are only sometimes the most effective way to support a project. Donations might not buy developer time to drive new features, but they can help to cover the costs of things like hosting, bandwidth, and marketing, which can free up developer time to work on the project.

Apart from funding projects you like or ones trending on social media, you should ensure that your donation is used in the most effective way possible.

  • The purpose of the project. What is the project trying to achieve? Do you believe in its mission?
  • The popularity and activity of the project. How many people are using the project? How often are new features being added?
  • The financial needs of the project. How much money does the project need to operate? How will the money be used?
  • The transparency of the project. Is the project’s development process transparent? Are financial records made public?

Tips before you part with your Bitcoin

Here are some additional tips for donating money to a project or charity:

  • Do your research. Before you donate, take some time to research the charity. Read its website, check out its reviews, and talk to people who have donated to the charity in the past.
  • Ask questions. If you have any questions about the charity, don’t hesitate to ask. The charity should be happy to answer your questions.
  • Donate directly to the charity. Avoid donating through third-party websites or fundraisers. This will help ensure that your donation goes to the intended recipient.
  • Get a receipt. If you donate more than $250 (or the local amount that applies to you and the country you live in), you can deduct your donation from your taxes and be sure to get a permit/receipt from the charity.

Avoid paying tax on unrealised gains.

Donating Bitcoin directly to a nonprofit instead of selling and donating cash is also tax-efficient. Taxpayers can avoid paying capital gains taxes while receiving a higher tax deduction at the fair market value compared to the lower after-tax cash amount.

  1. taxpayer holding Bitcoin that has appreciated can deduct the fair market value of the Bitcoin held for more than one year. 
  2. If you’ve held Bitcoin for less than a year, deduction from donated Bitcoin is limited to the lesser of their cost basis or fair market value.

If you’re donating to secure a tax rebate, you will need to check with your local tax office regarding amounts and the requirements to file a tax return. 

In the US, for example: 

  • Bitcoin donations under $250: you’ll need to complete Schedule A of Form 1040 and provide a donation receipt from the charity.
  • Bitcoin donations over $250 and up to $500: you’ll need to complete Schedule A of Form 1040 and provide “written acknowledgement” from the charity to substantiate your donation.
  • Bitcoin donations above $500: you’ll need to complete Section A of Form 8283.
  • Bitcoin donations exceeding $5,000: you’ll need to complete Section B of Form 8283, provide written acknowledgement from the charity, and an appraisal needs to be conducted by a qualified appraiser.

Consider your privacy

Not every donation is centred around tax efficiency and some might be to send money to those who might be in hostile locations or find it hard to access other forms of funding. Since Bitcoin is uncensorable money when used on-chain, it makes for the ideal medium to circumvent sanctions and other barriers, but it has its limits. 

Bitcoin transactions are pseudonymous, meaning that the sender and recipient of a transaction are not publicly linked. However, it is possible to link transactions together if you have enough information. This means that if you donate Bitcoin to a cause that is deemed taboo, it is possible for chain analysis to track your donation and learn about your financial activity if you or the recipient don’t employ privacy best practices. 

If privacy is of concern, consider working with projects that run their infrastructure like a BTCPay Server. On your end, use privacy-preserving tools like CoinJoin and a burner wallet for donations.

Beware of scams

Scammers often create websites or social media accounts that offer fake charities or projects that accept Bitcoin. These accounts mimic established projects to confuse users into donating to them instead, or they may create their projects based on what they feel is trending on social media and can be used as a believable story to convince people to donate. 

These accounts know they’re in a race against time before they are reported or flagged, so they’ll usually try to use high-pressure tactics via instant messaging or emails. If you’re feeling pressured by an individual or entity to donate, you might be in the crosshairs of a scammer. 

Bitcoin is rather unforgiving when it comes to mistakes, if you donate to a scam, its near impossible to recover those funds. If a project seems fishy or you need help finding enough detail, steer clear and focus on those open to providing more information on what they do. If you want to donate to projects offering transparency, you can use platforms like Geyser or OpenSats instead. 

Do your own research.

If you want to learn more about Bitcoin Donations, use this article as a jumping-off point and don’t trust what we say as the final say. Take the time to research, check out their official resources below or review other articles and videos tackling the topic.

Disclaimer: This article should not be taken as, and is not intended to provide any investment advice. It is for educational and entertainment purposes only. As of the time posting, the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency, as all investments contain risk. All opinions expressed in these articles are my own and are in no way a reflection of the opinions of The Bitcoin Manual

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