Should charities accept crypto donations?

With cryptoassets growing in popularity exponentially, digital currency donations to nonprofits and foundations are becoming more common. As generous and potentially impactful as these offers may be, acceptance of crypto donations should be assessed carefully, with expert help, and ideally with buy-in from all levels of your client’s organization.

While you’ve probably heard of bitcoin, it’s only a 10,000 virtual currencies. In 2021, we have seen steep rises and falls in many of these cryptoassets, the value of which tends to be extremely volatile. Some wealthy people who have made a profit seek to dispose of their assets without having to pay capital gains taxes: doing good without declaring expensive gains. Yet when it comes to donating cryptocurrency to nonprofits and foundations, Discretion is the best part of value because this concept is still in its infancy.

Evaluate the benefits of crypto donations

Internal Revenue Service classifies donated cryptocurrency as property, not currency. This means that donors can avoid capital gains by making an in-kind donation. As with any other complex gift your customer may have received, documentation and risk assessment are paramount. A third party organization can be helpful in valuing these assets.

Here are some other high-level considerations:

  • What are the risks associated with accepting a potentially volatile asset?
  • Will your customer incur additional operating costs or complexities in trying to meet this new type of demand?
  • Does it make sense to sell the cryptoassets immediately or keep them as part of your client’s investment portfolio?

Answering these general questions means digging deeper into and consulting with experts on the legal and operational aspects of a crypto donation.

Crypto donation checklist

Here are five factors to consider in helping your foundation and nonprofit clients decide whether or not to accept in-kind cryptoasset donations:

  1. Politics and governance
  • Who among your client’s staff is involved in the decision-making process? Has your customer been notified the board and asked for their opinion?
  • Does your client have procedures in place to document the discussion of gift acceptance and investment policies?
  1. Ethics
  • While not all cryptoassets are energy intensive, the environmental impact of digital currency ‘mining’ is of concern to some. If your client’s mission is focused on climate change, the ethical angle may be worth considering.
  • If your client is concerned about the track record of a donor offering a large sum of cryptoassets, consult attorneys who specialize in anti-corruption reviews.
  1. Investments
  • Is it your customer’s instinct to immediately liquidate a crypto donation and use the resulting money for programming, operating expenses, etc. ? Where is hold on to it for possible future appreciation, with the caveat that losses might be just as likely as gains over time? Your client’s investment committee and financial advisor should be part of this conversation.
  • Would your customer use a cash donation to purchase bitcoin or other virtual currency? Otherwise, holding crypto in your investment portfolio might not be the right decision.
  1. Development
  • Marketing a crypto acceptance program could alert donors that your client’s nonprofit has done its homework, built an infrastructure to accept crypto, and knows the tax benefits for donors.
  • Opening up to crypto donations could attract younger donors, who might be more likely to have crypto holdings and recognize the benefit of offsetting gains made between these assets.
  • Keep in mind that donors who plan to donate digital currencies will need a qualified appraiser to document the value of the crypto.
  1. Operations
  • Cryptocurrencies are held in digital wallets, accessible with a password known only to the owner. Unfortunately, passwords are easy to lose or forget. It is estimated that 20% of the value of all bitcoin is lost and probably unrecoverable due to owners forgetting passwords. Considering the healthy turnover of many nonprofits, having a rigorous protocol in place for maintaining and recovering passwords is essential if your client intends to build their own wallet.
  • In terms of IRS reporting requirements, crypto donations must be disclosed as non-cash contributions.