Should Nonprofits Accept Cryptocurrencies, like Bitcoin, as Donations?
Over the course of the past several years, we have seen the rise of cryptocurrencies such as Bitcoin, Ripple, Ethereum, and many other ICOs. These currencies now hold an estimated value of $700 billion as of April 17, 2018! As these currencies appreciate, many early holders of the currencies have generated significant amounts of wealth. In turn, there have been some incredible stories such as DonorsChoose, where a single donation of Ripple covered every single request on the platform, representing $29 million and will reach more than 16,500 public schools nationwide.
Many other organizations have started to accept cryptocurrencies for donations like: The Wikimedia Foundation, United Way Worldwide, and Khan Academy. Even with the overarching question about the value and longevity of cryptocurrencies, nonprofits need to ask an important question:
Should my nonprofit organization accept cryptocurrencies in our fundraising efforts?
In this post we go over the tax implications and other considerations to help determine if you should start accepting cryptocurrency donations. NOTE: that the following is not investment advice. The value of cryptocurrency could go to zero — please consult your financial advisor.
The IRS has stated that, for tax purposes, cryptocurrencies are considered assets and not currencies. This means that traditional gain and loss principles will apply for donors, and cryptocurrency donations to exempt non-profit organizations will not be considered taxable income when when sold and exchanged for cash by the organization.
What does this mean for donors?
This means donors are entitled to a larger deduction when they donate their cryptocurrency to a qualifying non-profit organization. The deduction depends on how they held the cryptocurrency:
- If they donate cryptocurrency that was held on a short term basis, meaning less than one year, they will be able to deduct the lesser of cost basis or fair market value up to 50% of adjusted gross income.
- If they donate cryptocurrency that was held for more than a year as a capital asset, the deduction would be the fair market value of the gift up to 30% of adjusted gross income.
- If the currency is subject to ordinary gain or loss treatment in the hands of the donor, the donor may deduct the cost basis of the gift up to 50% of her adjusted gross income.
These rules are very favorable to donors holding appreciated virtual currency as capital assets, allowing them to avoid incurring a tax for capital gains on the cryptocurrency. With any large gains in cryptocurrencies, donors are incentivized to give a portion away similar to gifts in securities (i.e. stock).
What does this mean for your tax exempt organization?
From a tax perspective, your nonprofit organization would handle this very similarly to other non-cash assets:
- The IRS has classified cryptocurrency as property for federal income tax purposes. Therefore, the sale of the cryptocurrency, regardless of how long the property is held and regardless of any gains, is not taxable income.
- For recording purposes, if held, cryptocurrency should be treated as a financial asset and should be reported at fair value in your financial records. The fair value should be documented on the date of the transaction.
The last point, while not difficult, will add in some additional reporting not only for the government, but also your constituents. Any quarterly reports or audited financials will need to take the value at the time of the disclosure.
Here are other benefits for accepting cryptocurrency:
Accepting cryptocurrency donations opens up your organization to new funding streams, especially with the proliferation of individuals owning these virtual currencies. As we mentioned earlier in this post, there has been a significant amount of wealth realized by cryptocurrencies appreciating over the past several years. Not only will your nonprofit be able to tap into this newfound wealth, but it is also easier for international donors to fund your nonprofit without the complexity of foreign exchange fees or other currency considerations.
Next, fees associated with accepting cryptocurrency donations are notably lower than credit card processing fees or other third party fees, like PayPal or Western Union. For example, Coinbase doesn’t charge any processing fees for donations to 501(c)(3) nonprofits and charities, so the organization receives the entire donation.
Lastly, if you are a nonprofit that needs to disburse funds to other parts of the country or the world, cryptocurrencies serve as an easy way to transfer funds. Similar to how international investors do not need to worry about local currencies or foreign exchange fees, nonprofits can easily transfer their balances (where applicable) to help fund projects.
Other considerations before your organization accepts cryptocurrencies:
The volatility of cryptocurrencies is incredibly high. For example, in December 2017, Bitcoin almost his $20,000 and by February 2018 dropped below $7,000! How quickly do you want to convert the cryptocurrency into cash? Extreme fluctuations in cryptocurrency valuations makes it a risky investment for nonprofit organizations to hold onto cryptocurrency. Most organizations that want to avoid the up-and-downs of accepting cryptocurrency donations use a third-party processor to immediately convert cryptocurrency donations to cash.
Another consideration is recognizing the value of cryptocurrencies. How do you plan to track and provide receipts for cryptocurrency donations? In order for the donor to receive a charitable deduction for property valued at $500 or more the organization must provide the donor with a signed 8283 Form. There are some processing vendors like BitPay and Coinbase that will help provide a market value receipt to the donor, giving your donors the receipt they need for personal and taxation purposes, which is critical for major gifts.
Whether or not your organization decides to accept cryptocurrency donations, we encourage you to speak to a qualified professional before making any financial decisions for your organization as things may change in the future.
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