What is a Donor Advised Fund?
A Donor Advised Fund (DAF) is an incredibly flexible charitable giving tool. You can make a charitable gift, receive an immediate tax deduction, and then recommend grants from the fund over time. Think of it like a “lily pad” that provides a strategic resting place for your charitable assets before they reach their final destination.
Imagine a frog on the bank of a river preparing to jump to the other side. The frog represents your Bitcoin and the river is the path to charitable giving. The lily pad in the middle of the river is a Donor Advised Fund (DAF), a powerful tool for maximizing the impact of your philanthropic giving while receiving significant tax benefits. Let’s explore how this leap can bring about rewarding change.
Leap Forward: Gifting Bitcoin with Increased Value
You bought Bitcoin for $5,000 and it’s now worth $70,000, making a profit of $65,000. You can avoid paying capital gains tax on the appreciation by gifting it to your DAF. Here’s how the process works:
1. First hop: Get the deduction
The frog (your Bitcoin) hops from your personal holdings to the lily pad (DAF), allowing 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 Lilypad: Wait for distribution
While your Bitcoin is resting on the Lilypad, you have the flexibility to redesign your charitable giving strategy. You can keep holding your Bitcoin, convert some or all of it to cash, or diversify into other investments. The period of time that your Bitcoin is resting on the Lilypad is crucial to aligning your giving strategy with your financial goals.
3. The final step: donate to charity
Finally, the frog makes the final leap to the other side of the river – to the charity of your choice. This could be a hospital, school, religious organization, or even a Bitcoin development non-profit. The beauty of DAFs is that they simplify operations because the receiving charity can receive assets or cash. They don’t need to set up new Bitcoin infrastructure to receive gifts donated as Bitcoin.
application
Donor-advised funds can actually be used for several things.
Simplify Donations
Charities can accept cash donations, making it easier to manage their funds without having to deal with the complexities of holding and converting Bitcoin, while donors can take advantage of the tax benefits of donating appreciated Bitcoin and choose how long they want to hold their Bitcoin before final conversion and donation.
Alternative Coin Cleanup
Donor-advised funds can support donors with diversified cryptocurrency portfolios: Donors can gift alternative coins such as Ethereum to a DAF, sell them tax-free, and reallocate the proceeds into Bitcoin or other assets that align with their investment and philanthropic goals.
Strategic Tax Planning
A DAF is a tool that can be combined with many other tools. Jumping on board with Lilypad first provides the opportunity to combine it with other tax strategies such as Roth conversions and business sales. This approach can create a multiplier effect, increasing the overall tax efficiency of a donor’s financial plan. In effect, donors can time a large deduction to offset other income and frontload their charitable giving.
Gifts and Exchanges
You may have heard of the idea of ”use and exchange.” By using Bitcoin to buy back an equal amount, you can maintain your Bitcoin net worth. The concept of “gift and exchange” applies this to charitable giving, proving that gifting and buying back Bitcoin that has appreciated in value is more effective than gifting cash. Doing this increases your overall asset value. Gifting and buying back Bitcoin with a lower basis, rather than gifting cash, can potentially improve your financial situation by reducing future capital gains taxes, as your cost basis can be reset to the current market value.
An innovative approach: On-chain donor-advised funds
Sound Advisory, UI Charitable Advisorand Unleashed is pioneering a first-of-its-kind on-chain Donor Advised 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 configuration, the client, University Impact, and Unchained each hold a key. This structure allows clients to be assured that their Bitcoin is safely held on-chain while it awaits distribution to their chosen causes.
To our knowledge, no other structure like this exists where clients hold the keys and can see the on-chain status of their Bitcoin. This setup gives clients peace of mind knowing their charitable donations are secure and transparent, and sets a new standard in the management of donor-advised funds.
Conclusion
The metaphor of a Bitcoin frog hopping over the lily pad of a DAF to reach the other side of philanthropy illustrates the strategic benefits of channeling Bitcoin through a donor-advised fund. From the initial leap (tax deduction), to the flexible period on the lily pad (strategic planning), to the final impactful leap to your chosen charity, the process is designed to maximize both your philanthropic impact and financial benefits. Whether you’re simplifying your giving, streamlining your alt-coin positions, or integrating with other tax strategies, donor-advised funds offer a versatile and powerful tool for philanthropy.
By incorporating Bitcoin into your charitable giving strategy, you can make a big impact while enjoying great tax benefits. Take the plunge, put some Bitcoin on your Lily Pad, and watch it transform into a force for good. Get your money right, change the world. Jump in!
This is a guest post by Jessy Gilger of Sound Advisory. The opinions expressed here are entirely Jessy Gilger’s own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
