This article was originally published on Sound Advisory. here.
What is a recommended donation box?
An advisory trust is a highly flexible charitable giving tool that allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the trust over time. Think of it as a “lily pad” that provides a strategic place to rest your charitable assets before they reach their final destination.
Imagine a frog standing on the bank of a stream, ready to jump to the other side. The frog represents your Bitcoin, and the stream is the path to charitable giving. The green leaf in the middle of the stream is your charitable giving fund, a powerful tool to maximize your charitable impact while enjoying significant tax benefits. Let’s explore how this leap can be both rewarding and transformative.
Leaps: Gifting Estimated Bitcoins
You bought Bitcoin for $5,000, and now it’s worth $70,000, a gain of $65,000. By gifting that Bitcoin to a hedge fund, you can avoid capital gains taxes on the rise in value. Here’s how the process unfolds:
1. Initial Jump: Get the Discount
The frog (your bitcoin) jumps from your personal property to the lily pad (duff). This jump allows you to claim a charitable tax deduction for the full fair market value of the bitcoin at the time of donation, in this case $70,000.
2. On a water lily pad: waiting to be distributed
While your Bitcoin remains on the lily pad, you have the flexibility to redesign your charitable strategy. You can continue to hold your Bitcoin, convert some or all of it into cash, or diversify your investments into other investments. This period on the lily pad is important for aligning your giving strategy with your financial goals.
3. Final Step: Donate to Charity
Eventually, the frog makes its final leap to the other side of the river — your chosen charity. These can include hospitals, schools, religious organizations, and even nonprofits working on Bitcoin development. The beauty of a soft donation fund is that the recipient charities can receive either assets or cash, which simplifies their operations. They don’t need to build any new Bitcoin infrastructure to receive gifts that originated in Bitcoin.
Applications
Donor-advised funds offer several applications in practice:
Simplify donations
Charities can receive cash donations, making it easier for them to manage funds without the complexities of holding and transferring Bitcoin. At the same time, donors enjoy the tax benefits of gifting Bitcoin and can choose how long they hold the Bitcoin before the final transfer and donation.
Cleaning altcoins
Donor-advised funds can help donors with diversified crypto portfolios. Donors can donate altcoins, such as Ethereum or others, to the advisor’s donor-advised fund, sell them tax-free, and redistribute the proceeds into Bitcoin or other assets, in line with their investment and charitable goals.
Strategic Tax Planning
A DAF is a tool that can be combined with many other tools. The first jump on the water lily pad provides an opportunity to combine with other tax strategies, such as a Roth conversion or the sale of a business. This approach can create a compounding effect, enhancing the overall tax efficiency of the donor’s financial plan. In fact, the donor can time the large write-off to offset other income and allocate their charitable gifts in advance.
Gift and exchange
You may have heard of the idea of “spend and redeem”: you can spend your bitcoin and buy the same amount back to maintain your net worth. The concept of “gift and redeem” applies to charitable donations, suggesting that gifting appreciated bitcoin and buying it back can be more effective than simply donating cash. By doing so, you can increase the overall basis of your position. Instead of donating cash, gifting bitcoin with a low basis and then buying it back allows you to reset your cost basis to current market value, which can benefit your financial position by reducing future capital gains taxes.
Innovative Approach: Donor-Driven Funds on the Chain
Voice consultation, UI Charitable Advisorsand Unrestricted University Impact has pioneered the first of its kind donor advisory: the Donation on-chain Fund (DAF). This innovative solution uses a multi-signature setup to hold Bitcoin on-chain, ensuring unparalleled security and transparency. In this 2-of-3 multi-signature arrangement, the client, University Impact, and Unchained each hold a key. This structure allows clients to verify that their Bitcoin remains secure on-chain while they await its distribution to their chosen causes.
To our knowledge, there is no other structure like this, where a customer can hold a key and verify the status of their Bitcoin on-chain. This setup provides customers with peace of mind, knowing that their charitable contributions are secure and transparent, setting a new standard in donor-generated money management.
conclusion
The metaphor of a Bitcoin frog jumping across a DAF to the other side of the philanthropy ladder illustrates the strategic benefits of channeling your Bitcoin through a donor-advised fund. From the initial jump (tax deductible) to the flex period on the DAF (strategic planning) and finally, to the impactful jump to the charity of your choice, the process is designed to maximize your charitable impact and financial benefits. Whether you’re streamlining donations, cleaning up altcoin positions, or integrating with other tax strategies, donor-advised funds provide a versatile and powerful tool for philanthropy.
By incorporating Bitcoin into your charitable giving strategy, you can make a big impact while enjoying significant tax benefits. So seize the moment, let your Bitcoin bounce on the lily pad, and watch it transform into a force for good. Fix money. Fix the world. Jump ahead!
This is a guest post by Jesse Gilger of Sound Advisory. The opinions expressed here are entirely their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.