How to Donate Cryptocurrency to Charities

“There’s greater awareness among investors that this is an asset that can be donated,” says Tony Oommen, vice president of Fidelity Charitable, where $50 billion in assets were under management in donor-advised funds as of last June.

The sharp drop in the value of cryptocurrencies in recent weeks could certainly reduce such donations in the short term. But philanthropy professionals believe that in the long term, more donors will be using cryptocurrencies as part of their donations.

“Cryptocurrency has the potential to expand the pool of donors,” says Una Osili, associate dean at the Lilly Family School of Philanthropy at Indiana University-Purdue University Indianapolis. “In particular, younger donors—millennials and Gen Z—are more likely than others to own cryptocurrency, and many are starting to get involved in philanthropy.”

To be sure, many charities don’t take digital currencies yet. But ultimately, “charities that don’t accept cryptocurrencies will do so at their peril,” says Mr. Oommen.

Digital giving can entail lower transaction costs than traditional giving—avoiding credit-card fees, for example. Cryptocurrencies also make it easier to donate overseas, as no exchange rates or international financial regulations apply, Dr. Osili says.

The ease of DAFs

One of the increasingly common ways to donate cryptocurrencies is through donor-advised funds, products administered by Fidelity Charitable, Schwab Charitable and others. Investors in these funds can claim a tax deduction for the year in which a deposit to the fund was made. But the money can be dispersed in future years, at the investor’s direction, to charities of their choice.

When cryptocurrencies are placed in a DAF they generally are converted immediately into dollars, to lessen exposure to cryptocurrency volatility. There is no fee for the donor.

Meanwhile, whether gifting cryptocurrency through a DAF or directly to a charity, gifts to officially recognized charities are covered by the IRS charitable tax deduction. You can deduct the full value of the donation from your taxes if you held the cryptocurrency for more than a year, and there is no capital-gains tax owed.

If the deduction is more than $5,000, the IRS requires that you get an independent appraisal of the cryptocurrency’s value when you donate it. That generally will cost “a few hundred dollars,” Mr. Oommen says.

Cryptocurrency donors can find such appraisers by consulting with a tax accountant or lawyer. Irene Sandler, vice president of marketing strategy for a global information-technology services company, says she paid under $200 for an appraiser when she donated four ethereum coins—together valued at $19,247—to her donor-advised fund.

‘The tax benefit’

Ms. Sandler, who believes in tithing, or regularly donating a portion of her income to charity, says she donated the ethereum coins because she bought them on a lark and “did nothing to deserve” the profits. Her donated ethereum was one part of bigger contributions to charities including the Union of Concerned Scientists, she says.

“The tax benefit of donating in crypto is the primary reason I do it,” says Penelope Linge, an investor in Park City, Utah. “Donating in bitcoin allows me to increase the size of my gifts.” Ms. Linge put some of her bitcoin in a donor-advised fund earmarked for Edesia, a group that seeks to prevent and treat malnutrition globally.

Both Ms. Sandler and Ms. Linge say it was simple to transfer cryptocurrency to their donor-advised funds. “I just had to fill out a few forms, transfer my key from

Coinbase,

and that was it,” Ms. Sandler says. A key is the password for digital currencies, and Coinbase is a cryptocurrency exchange.

While a few nonprofits, including United Way and Unicef, accept cryptocurrency directly, others get help from third-party services. One company providing such services is Giving Block, which handles the logistics of transferring cryptocurrencies. Typically, the charities, not the donors, pay a service fee to those third parties.

Mr. Weil is a writer in West Palm Beach, Fla. He can be reached at reports@wsj.com.