In recent years, cryptocurrency has gained traction as a widely held investment and medium of exchange. In fact, your nonprofit organization may wonder if, how, and when it should start accepting cryptocurrency donations. Information on contributions of cryptocurrency suggests that donors of digital assets are willing to give philanthropically and often make larger than average gifts to 501(c)(3) charities.
What is Cryptocurrency?
Cryptocurrency is a type of digital currency or other digital medium of exchange that is not currently backed or regulated by the government. Instead of using a central bank to generate units of currency, cryptocurrencies and other digital assets utilize encryption and technology to generate units of currency or value that are verified, recorded and settled on a secure and encrypted network ledger.
Because of this setup, there are thousands of different types of cryptocurrencies currently being exchanged on a daily basis. Examples of well-known cryptocurrencies include Bitcoin, Ethereum and Dogecoin.
What You Should Know About Accepting Cryptocurrency Donations
Accepting cryptocurrency donations can be a great way for nonprofits to raise additional funds and reach a new subset of potential contributors. Cryptocurrency donations have become increasingly popular in recent years due to tax incentives for donors when they contribute directly to a qualified charity.
The IRS classifies digital assets, such as cryptocurrency, as property (not cash) for federal tax purposes. This means that an investor that holds cryptocurrency may realize a taxable gain or loss on the sale or exchange of the digital asset.
However, the investor with appreciated cryptocurrency may avoid the capital gains tax by donating the cryptocurrency directly to a 501(c)(3) charity. It’s a win-win situation for the donor; cryptocurrency donations to qualified charities are not subject to the capital gains tax, the donations are potentially tax-deductible up to fair market value and the donor can support a mission or cause they are passionate about.
Risks to Your Nonprofit for Cryptocurrency Acceptance
When considering gifts of cryptocurrency, it’s important for nonprofits to review the risks associated with accepting and holding these assets. Because digital assets such as cryptocurrency rely on perceived value and are not backed or regulated by the government, they have the potential to be extremely volatile and are generally considered to be both a risky and complex asset.
The collapse of the large cryptocurrency exchange FTX in 2022 and its subsequent bankruptcy proceedings should serve as a cautionary warning to nonprofits when accepting cryptocurrency donations. Nonprofit organizations that received grants or assistance from FTX’s associated charity organizations may be faced with claw back provisions if it is determined that donated digital assets were illegally obtained.
Overall, this general lack of stability within the cryptocurrency market, combined with shifting regulations as governments grapple with how to oversee digital asset investments and transactions, can make holding cryptocurrency undesirable for nonprofit organizations. In response, many nonprofits have determined that a best practice is to convert cryptocurrency donations immediately to cash; a practice traditionally utilized in connection with the receipt of securities donations.
Protect Your Nonprofit from Cryptocurrency Risks
Prior to accepting donations of cryptocurrency or other digital asset types, nonprofit organizations should ensure all internal policies and procedures (e.g., gift acceptance policies and investment policies) are updated to reflect the ability to accept donations of cryptocurrencies and other digital assets. In addition, make sure the policies clearly outline the organization’s process for handling the asset upon receipt.
Because cryptocurrency is considered property, nonprofits should ensure that all policies and procedures treat these contributions as “non-cash” donations, even if immediately converted to cash upon receipt. Nonprofit organizations should ensure that policy and procedure updates are reviewed and approved by the appropriate committees, internal management and your board of directors. Remember, cryptocurrency is a quickly evolving alternative to cash, so once a policy is in place, it is recommended that you routinely review it.
Another layer of added complexity when accepting cryptocurrency donations is that many banks and financial institutions may not accept, hold, or trade in digital assets. Instead, many nonprofit organizations must seek trusted third-party vendors or processors to assist with the receipt and immediate conversion of cryptocurrency donations to cash.
As donations of digital assets become increasingly popular, there are many large cryptocurrency donation platforms such as The Giving Block, Every.org and Engiven that can assist nonprofits with accepting, converting and reporting these contributions. While there are typically charges and fees associated with these services, it can be well worth the additional cost to utilize a reputable third party in lieu of managing these assets internally.
Another potential avenue for charities in accepting cryptocurrency donations is to utilize a 501(c)(3) intermediary, such as a donor advised fund (DAF), that accepts the cryptocurrency donations and takes responsibility for all reporting requirements.
Nonprofits should carefully research and vet third-party processing platforms, intermediaries, or other service providers prior to selection to ensure the entity is reputable and will meet the organization’s specific cryptocurrency needs.
Nonprofit Cryptocurrency Tax Reporting Considerations
Cryptocurrency donations are contributions of property and as such nonprofits should issue a non-cash donation receipt to the donor. In addition, the IRS property rules apply and the conversion of cryptocurrency to cash within three years of receipt by a nonprofit will trigger the need for the organization to file a Donee Information Return (Form 8282). For donations of cryptocurrency over $500, donors are required to complete Noncash Charitable Contributions (Form 8283) and attach it to their tax return.
Donors and charities should be aware digital asset donations over $5,000 require the donor to obtain a qualified appraisal as well as the charity’s signature on Form 8283. In fact, the IRS recently issued an internal legal memorandum emphasizing that qualified appraisals are required even for cryptocurrencies that are traded on an active exchange. Nonprofits should track these reporting requirements to maintain accurate internal records and to provide accurate information to their donors.
Lastly, nonprofits should be prepared to report noncash donations of cryptocurrency in revenues on their annual Form 990 series return. Depending on the value of cryptocurrency and digital asset donations received during the tax year, organizations may be required to report these non-cash donations on Form 990, Schedule B, Schedule of Contributors and Schedule M, Noncash Contributions.
Cryptocurrency and digital assets may open up new opportunities for nonprofits to expand their donor base and revenues. However, the risks and reporting requirements must be considered before accepting these types of donations.
There’s a lot to consider when it comes to accepting cryptocurrency donations. It’s important to consider all the risks and reporting requirements.
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