Leap of Generosity: Jumping into Bitcoin Donor Advisory Funds

What is a Donor Advisory Fund?

A Donor Advised Fund (DAF) is a very flexible charitable giving tool that allows you to make charitable contributions, receive an immediate tax deduction, and recommend grants from the fund over time. Think of it as a “lily pad” that provides a strategic resting place for charitable assets before they reach their final destination.

Imagine a frog standing in a stream, ready to jump to the other side. The frog represents Bitcoin, and the stream represents the path to charitable giving. The water lily in the middle of the stream is a donor-advised fund (DAF), a powerful tool for maximizing charitable impact while enjoying significant tax benefits. Let’s take a look at how this leap can be rewarding and transformative.

LEAP: Gifting Bitcoin Thanksgiving

You bought Bitcoin for $5,000 and it is now worth $70,000. That’s a $65,000 profit. If you gift this increased Bitcoin to a DAF, you can avoid paying capital gains tax on the increase. Here’s how it works:

1. Initial Hop: Get a Deduction

The frog (Bitcoin) jumps from personal property to DAF. 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 the training: Waiting for distribution

While Bitcoin is on the cusp, you have the flexibility to redesign your philanthropic strategy. You can continue to hold Bitcoin, convert some or all of it to cash, or diversify into other investments. This period on the cusp is important to align your giving strategy with your financial goals.

3. The final leap: Donating to charity

Eventually, the frog makes its final leap to the other side of the stream, to the charity of your choice. This could be a hospital, a school, a religious group, or even a Bitcoin development non-profit. The beauty of a DAF is that the beneficiary charity can receive assets or cash, simplifying operations. There is no need to build a new Bitcoin infrastructure to receive gifts that started with Bitcoin.

Application

Donor-advised funds actually serve a number of applications.

Simplify your donations

Charities can receive cash donations, making it easier to manage funds without having to deal with the complexities of holding and converting Bitcoin. Meanwhile, donors can enjoy the tax benefits of gifting appreciated Bitcoin and choose how long to hold the Bitcoin before the final conversion and grant payment.

Replacement Coin Cleaning

Donor-advised funds can help donors with a diverse cryptocurrency portfolio. Donors can donate Ethereum or other altcoins to a DAF, sell them tax-free, and reinvest the proceeds into Bitcoin or other assets to meet their investment and charitable goals.

Strategic Tax Planning

DAFs are a tool in the belt that can be combined with many other tools. Jumping into the lily pad for the first time offers the opportunity to combine with other tax strategies, such as Roth conversions or business sales. This approach can create a multiplier effect, improving the overall tax efficiency of a donor’s financial plan. In fact, donors can time large write-offs to offset other income and advance charitable giving.

Gift and exchange

You may have heard of the idea of ​​“spend and replace.” You spend Bitcoin and buy back the same amount, maintaining a net Bitcoin position. The concept of “gift and replace” applies this to charitable giving, suggesting that gifting and repurchasing appreciated Bitcoin may be more effective than giving cash. This increases the overall basis of your position. Instead of giving cash, gifting Bitcoin at a lower base and then repurchasing it can help your financial situation by resetting your cost basis to its current market value, which can reduce future capital gains taxes.

An Innovative Approach: An On-Chain Donor Advisory Fund

Sound Advisory, UI Charitable Advisors, and Unchained pioneered the first on-chain donor advisory fund (DAF). This innovative solution uses a multi-signature setup to keep Bitcoin on-chain, ensuring unparalleled security and transparency. In this 2/3 multi-signature scheme, the client, University Impact, and Unchained each hold a key. This structure allows the client to ensure that the Bitcoin remains securely on-chain until it is distributed to the purpose of their choice.

To our knowledge, there is no such structure where the client holds the keys and can verify the on-chain state of the Bitcoin. This setup sets a new standard for donor-advised fund management, giving clients peace of mind knowing their charitable donations are safe and transparent.

conclusion

The Bitcoin frog metaphor of crossing the DAF training to the other side of charity illustrates the strategic benefits of channeling Bitcoin through a donor-advised fund. From the initial jump (tax deductible) to the flexible duration of the training (strategic planning) to the final impactful jump to the charity of your choice, the process is designed to maximize both philanthropic impact and financial return. Whether you’re simplifying your giving, consolidating your alt-coin position, or integrating with other tax strategies, donor-advised funds provide a versatile and powerful tool for philanthropy.

Incorporating Bitcoin into your charitable giving strategy can have a significant impact while taking advantage of significant tax benefits. So take the leap and let Bitcoin take over your practice and watch it become a force for good. Fix your money. Fix the world. Get going!

This is a guest post by Jessy Gilger of Sound Advisory. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.