What is a donor advisory fund?
A donor-advised fund (DAF) is a highly flexible charitable giving vehicle that allows you to make charitable donations, receive an immediate tax deduction, and then recommend grants from the fund over time. Think of it as a “lily pad” that provides a strategic resting place for your charitable assets before they reach their final destination.
Picture a frog balanced on the bank of a stream, ready to leap to the other side. That frog represents your Bitcoin, and the stream represents the path to giving. The lily pad in the middle of the stream is a donor-advised fund (DAF), a powerful tool for maximizing your charitable impact and earning significant tax benefits. Let’s look at how that leap can be both rewarding and transformative.
Horse Racing: Giving Away Valuable Bitcoins
You bought a bitcoin for $5,000, and it’s now worth $70,000 — a profit of $65,000. By gifting this appreciated bitcoin to a DAF, you can avoid capital gains taxes on the increase in value. Here’s how the process works:
1. The initial jump: getting a deduction
The frog (your bitcoin) jumps from your personal savings to the lily pad (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 a water lily leaf: waiting for spread
While your bitcoin is on the lily pad, you have the opportunity to redesign your giving strategy. You can continue to hold the bitcoin, convert some or all of it to cash, or diversify into other investments. This period on the lily pad is critical to aligning your giving strategy with your financial goals.
3. The final leap: donate to charity
Eventually, the frog makes its final leap to the other side of the stream — the charities of your choice. These could be hospitals, schools, religious organizations, or even nonprofit bitcoin mining organizations. The beauty of a DAF is that recipient charities can receive assets or cash, which simplifies their operations. They don’t have to set up any new bitcoin infrastructure to receive donations that were originally created as bitcoins.
Applications
Donor-funded funds offer several practical applications:
Making donations easier
Charities can receive cash donations, making it easier for them to manage their funds without having to navigate the complexities of storing and converting bitcoins. Meanwhile, donors enjoy the tax benefits of gifting valuable bitcoins and can choose how long the bitcoins are held before they are finally converted and granted.
Alternative coin cleaning
Donor-advised funds can help donors with diverse crypto portfolios. Donors can donate alternative coins like Ethereum or others to a DAF, sell them tax-free, and redistribute the proceeds into Bitcoin or other assets that align with their investment and charitable goals.
Strategic tax planning
A DAF is a tool in the tool belt that can be combined with many other tools. The initial leap into the lily offers the opportunity to combine with other tax strategies, such as Roth conversions or business sales. This approach can create a multiplier effect, increasing the overall tax efficiency of the donor’s financial plan. In fact, the donor can time large write-offs to offset other income and front-load their charitable giving.
Gift and replace
You may have heard of the idea of “spend and replace”: you can spend your bitcoins and buy back the same amount to maintain your net bitcoin position. The concept of “give and replace” applies this to charitable giving, suggesting that gifting appreciated bitcoins and buying them back can be more effective than simply giving cash. By doing this, you increase the overall basis of your position. Instead of giving cash, gifting low-basis bitcoins and then buying them back allows you to reset your cost basis to the current market value, potentially benefiting your financial position by reducing future capital gains taxes.
Innovative approaches: donor-funded funds within the chain
Sound Advisory, UI Charitable Advisors, and Unchained have pioneered a first of its kind: an on-chain donor-advised fund (DAF). This innovative solution uses a multi-signature setup to maintain bitcoin on-chain, providing unmatched security and transparency. In this 2/3 multi-signature scheme, the client, University Impact, and Unchained each hold a key. This structure allows clients to ensure that their bitcoin is securely stored on-chain, awaiting distribution to the causes of their choice.
To our knowledge, there is no other structure like this where the customer can hold the key and verify the status of their bitcoin on the chain. This setup gives customers peace of mind knowing that their charitable contributions are both secure and transparent, setting a new standard in donor-advised fund management.
Conclusion
The metaphor of a Bitcoin frog jumping over a DAF lily pad to get to the other side of the charity illustrates the strategic benefits of channeling your Bitcoin through a donor-advised fund. From the initial jump (tax deduction) to the flexible period on the lily pad (strategic planning) and finally the efficient jump to the charities of your choice, the process is designed to maximize both your charitable impact and your financial benefits. Whether you’re simplifying giving, clearing alternative coin positions, or integrating with other tax strategies, donor-advised funds provide a versatile and powerful tool for philanthropy.
By incorporating Bitcoin into your charitable strategy, you can make a significant impact while enjoying significant tax benefits. So take the plunge, let your Bitcoin jump on the lily pad, and watch it become a force for good. Fix the money. Fix the world. Jump!
This is a guest post by Jesse Gilger of Sound Advisory. The opinions expressed are their own and do not necessarily reflect the views of BTC Inc or Bitcoin Magazine.
