Last week, Vitalik Buterin, the Russo-Canadian Etherum cofounder and frontman, donated the equivalent to a billion dollars worth of crypto to charity.
First of all, well done Vitalik.
I think we need to create a new social title for mega donors. Similar to how we call billion-dollar companies “unicorns,” we need a name for individuals who donate a billion+ of their own personal assets in their lifetime. NeoBillionaires? Billionaire 2.0? Heavenly treasurers? I’ll take suggestions. This behavior should be liberally applauded.
But why am I mentioning his donation on this blog?
Here’s the thing: notice I said he donated assets worth a billion and not cash. There is a very specific reason he did that. It doesn’t take away from his generosity one iota, but it does add to his cunning.
In short, there are situations where donating an asset saves you more money than selling it.
How Normal People Donate
You have a job. You earn $80,000/year. You donate $10,000. If you’re single or married, you’re still below the standard deduction so your generosity means nothing in terms of taxes. You take the standard deduction.
And that’s the end of the story. Yes, it’s “good” that the standard deduction is high in general, but it doesn’t give you any sort of advantage for having donated. Is that why you donate? No, but as a rule of life, you should always want to find any advantage where you can. Why not?
How Rich People Donate
We’re going to look at Vitalik’s strategy as a key example. This example was directly inspired by (AKA stolen from) Matt Levine’s Money Stuff newsletter on Bloombers, which is a great resource for market news and analysis.
Here’s a hypothetical situation.
- You buy a bunch of a new joke cryptocurrency, an alternative coin based on a meme, for approximately $0.
- Then the price of that altcoin shoots up so that your stash is worth $100,000.
- “Worth” $100,000 in the sense that, if you multiply the trading price of the coin by the number of coins you own, you get $100,000. But if you actually tried to sell all your coins into a very thin market, you would crash the price and end up with much less money, say $50,000.
- Let’s assume that your capital-gains tax rate is 20%. If you sold your coins, you would end up with $40,000 after tax (a $50,000 sale price minus 20% tax).
- Let’s also assume that you have, say, $500,000 of ordinary income this year. Also let’s assume that you pay a 45% tax rate on ordinary income.
- Instead of selling the joke cryptocurrency for $50,000, you can donate it to charity.
- If you donate it, you take a $100,000 tax deduction, because that’s the fair value of your stash at the time of the donation.
- If you pay a 45% tax rate, that $100,000 tax deduction is worth $45,000 to you.
- Donating the joke crypto is worth more to you than selling it.
Now, Matt is making a few (hypothetical) assumptions.
One, is Vitalik bringing in more than $500,000 or similar level of income? Probably. While he hasn’t sold off his Ethereum to my knowledge, he is a sought-after speaker and personality as he leads the Ethereum community. In his tokens alone, he is a billionaire. He recently became the world’s youngest billionaire. With recent crypto volatility (BTC is sitting at around $45,700 right now—yikes) he may no longer be in the billionaire tier, but that’s irrelevant. He’s not selling Ethereum anytime soon. Instead, he sold a bunch of a joke crypto called Shiba Inu, or Shib for short (which is not Doge, but is a meta joke based off Dogecoin. I know, it’s a lot).
Second, I don’t know how much Shib Vitalik had, but presumedly it was enough to crash the market upon selling.
Third, the amount you’d save from taxes reduced via your donation must be greater than the benefit you’d reap from a normal sale. This is a personal calculation so no one size would fit all. Your tax situation is unique and I’m not your advisor.
All that to say—there is a very real possibility Vitalik saved himself millions of dollars in taxes through this donation. If he did, then well done once again.
Okay, but does this matter outside of crypto?
Sure. There’s an older, much more common way of saving taxes. And it’s oh-so chic.
Why do rich people collect art? Sure, it’s pretty. You also get status among your peers for being known as a patron.
But financially, you can also save a ridiculous amount of money.
- You find a promising young artist
- You buy her art—decent pieces but certainly affordable (a few thousand dollars at most)
- You sponsor a gallery showing of her art and invite all your posh friends and art critics
- Now that she has some notoriety, either you have her auction off one of her works, or you donate one you already own to an auction for charity.
- If bidders take the bait, her art is bidded up to a tidy sum (five or six figures). If no one else bids, you bid on it yourself and drive up its market value
- Now that you’ve bid up the art’s worth, the rest of her art is now worth much more. Good thing you already own a lot of it.
- Now you donate her art to a gallery. You can deduct a ridiculous amount of charitable giving from your taxes through this classic and simple maneuver.
Keep it mind—you want to donate and not sell it. If you sell it, the market could realize the genuine value of the art is a lot lower than what you bid last on it. If that happened, you would lose your investment when you bid up the pieces at auction.
Again, this method is useful when you want to reduce your tax burden. If you aren’t earning significant money, there’s not much use in reducing taxes.
How can a normal person start to donate like the rich?
Simple: open a donor-advised fund.
Until you get rich-rich, you’ll probably have moments where you come into a few big windfalls of wealth. Maybe you sold your house at a premium in a hot market, or you had a killer year of sales, or you were gifted a meaningful inheritance.
How do you protect yourself from taxes in these events?
You honestly won’t ever be fully protected because the government has the monopoly on violence. But you can reduce your taxes with a donor-advised fund.
The benefit of this account tool is it lets you “donate” money right away without deciding what organizations are going to receive it.
Maybe you’re always donating to a local community arts program. They get $200/month from you. Suddenly you have an extra $50,000. You know if you give them that much right away they won’t know what to do with it. So instead, you designate a good chunk of the money for your donor fund. Now you get to claim that amount as “donated” on this year’s taxes, and then you can divvy it out to your favorite organization (or any other) at your leisure over the years.
Will this save you money? Sure will. Not on the level of the art donation scheme, so maybe tuck that one away for when you’re rich enough for that to matter.