Is Your Not-for-Profit Prepared to Accept Cryptocurrency Gifts?

When cryptocurrencies first came on the scene, they were widely viewed as a fringe development, but in recent years they’ve moved closer to the mainstream. As more individuals and businesses have begun accepting payment with cryptocurrency, not-for-profits increasingly hear from donors who wish to make donations using the currency. If your organization is one of them, you need to weigh several issues before jumping in.

Cryptocurrency in a Nutshell

Cryptocurrency generally refers to a decentralized form of digital currency. You may have heard of Bitcoin or Ethereum, but thousands of others also are available. Millions of people now use cryptocurrencies, particularly young adults and charitable-minded tech investors.

Transfers happen instantly and are tracked in a transparent blockchain ledger. Unlike traditional currencies, the ledger doesn’t reside with a central authority, such as a bank or government, but across public peer-to-peer computer networks. The value of cryptocurrencies derives in part from its scarcity. In the case of Bitcoins, for example, the supply is limited to 21 million “coins.”

One of the most significant concerns related to cryptocurrencies is their price volatility. The price for Bitcoin can shift more than 10% in a single day. Imagine a donation that drops that much in value within hours of receipt. Of course, cryptocurrencies also can quickly appreciate in value dramatically, which is one reason owners are interested in donating them — to avoid capital gains tax on the appreciated assets held for at least one year. The tax advantage provides a strong incentive for cryptocurrency owners to donate. But how can your not-for-profit accept such donations?

Critical Considerations

If your organization is thinking about accepting cryptocurrency donations, be sure to update your policies and take the necessary precautions to prevent risks. The updates should address your organization’s procedures for monitoring valuation as well as additional financial disclosures. These include forms required by the IRS as well as disclosures in your organization’s audited financials.

Once you have decided to take the step, decide whether or not you will accept cryptocurrency donations directly and assume all of the risks. An option is to accept them through a third-party facilitator, such as The Giving Block, BitPay or Engiven. These platforms provide not-for-profits the chance to quickly convert crypto donations into dollars, before the value can fall. Facilitators typically charge a small fee, similar to credit card transaction fees. You should check with your financial institution before signing an agreement with a facilitator, though. Some are wary of transactions involving players in the virtual currency industry.

If you decide to accept crypto donations directly, and perhaps benefit from appreciation, you must create a “digital wallet” through a bank or mobile phone app. Wallets store the public and private “keys” required to send and receive cryptocurrencies. And you’ll need to implement internal controls and security measures to secure your keys and wallets.

When it comes to reporting obligations, the IRS says you should treat these obligations as non-cash contributions on Form 990 and, if applicable, Schedule M. Not-for-profits must file “M” if they receive more than $25,000 in non-cash contributions or contributions of art, historical treasures or similar assets, or qualified conservation contributions.

If you accept cryptocurrency directly and convert it to cash within three years after receipt, you must file Form 8282, Donee Information Return, and provide the donor a copy. If the donation is worth more than $5,000, your organization will need to sign the donor’s Form 8283, Noncash Charitable Contributions.

Here to Stay

More than 10 years after Bitcoin launched, cryptocurrencies appear to have some staying power. As many organizations confront financial shortfalls, it probably makes sense to consider accepting the donation of these virtual assets. Proper security and compliance measures — including a gift acceptance policy addendum addressing cryptocurrencies — are essential.

For information about cryptocurrency and your organization, including valuation and tax issues, contact us. We are here to help.

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