What is cryptocurrency? Simply put, it’s money that’s not in a physical form, otherwise known as digital money. Nonetheless, it shares some of the same characteristics of paper money in that it can be earned, used, and invested.
Why should you care? According to Gemini’s 2021 State of U. S. Crypto Report, 21.2 million adults own cryptocurrency (crypto), with an additional 19.3 million expecting to purchase it in the next 12 months. That adds up to a lot of potential donors! But, to get the donation, you must be able to accept the donation. Here’s why that’s a good idea….
For the donor, the tax benefits of donating crypto can be significant. Why? Because donating crypto is like donating a car, or a piece of art. None of these items must be sold to be donated. By avoiding a sale, the donor avoids taxable gains, which may be extremely attractive to someone who purchased crypto early on; and it gets even better. Not only can they avoid a taxable gain, but they may also be able to take advantage of a charitable deduction at the full market value of the crypto on the date of the donation. Win/Win/Win.
And it’s not just donors that make accepting cryptocurrency something worth thinking about. Certain foundations may begin designating crypto grant money. In 2017, The Pineapple Fund donated $55 million in Bitcoin to over 60 charities. Therefore, if your organization can accept crypto, it may qualify for grants that it never even thought about before.
But crypto seems confusing! It does, but it’s not. Accepting it is analogous to accepting a stock donation or a donation paid by credit card, depending upon which method you choose.
- The stock donation analogy: Set up a wallet. A wallet is a place to receive and store crypto. It’s very similar to the accounts you’ve probably set up to accept stock donations. It is a bit more complex, however, because it is not always easy to navigate, and it requires strong internal controls, including a policy surrounding liquidation of crypto assets. (Because of the price volatility surrounding crypto, most nonprofits choose to liquidate it immediately.) The advantage is lower trading costs. The disadvantage is that this option is best suited for organizations with some level of sophistication around the understanding of crypto currency.
- The credit card analogy: Open an account with a crypto payment processor. This is similar to the steps you took to accept credit card payments. Crypto payment processors allow you to accept crypto donations, usually from your website, and then they automatically convert those donations into U.S. dollars for transfer into your bank account.
You’ve convinced me. Now what are the back-end processes I should put in place?
- Gift acceptance policies. It all starts here. Gift acceptance policies should be updated to set parameters for crypto gifts. Your advancement team should be made aware that the IRS considers these donations noncash. That means any gift over $5,000 must have a qualified appraisal. Your organization doesn’t need that to accept the gift; however, the donor needs it to support the charitable deduction.
- Appropriate internal controls. If you establish a wallet instead of going with a crypto payment processor, internal controls should be more extensive. Who will be authorized to obtain the wallet? Who will have access to it? Who will be authorized to sell the assets in it? How many signers will be required to do this? How quickly should the assets be sold after receipt?
- Proper accounting. It is important to note that digital assets are an evolving area and accounting guidance is subject to change. However, as of this writing, cryptocurrency is treated as an intangible asset, just like patents or trademarks.
- The easy part occurs when it’s liquidated. A gain or loss is calculated using the exact same methodology you use when liquidating stock donations. The more difficult part occurs if your organization decides to hold it. If it is held, it must be evaluated to determine if it has a finite or indefinite life.
Although that sounds like a lot, most crypto will be considered an indefinite-lived asset, which means it should be tested annually for impairment, and more frequently if events indicate it is “more likely than not” impaired. With the volatility of crypto, these events could happen frequently throughout the year, possibly leading to an impairment loss that most certainly would affect your surplus or add to your deficit.
Since cryptocurrency now seems to have a permanent place in our lives and the news, it seems complicated and risky. Mining it, investing in it, purchasing it, and holding it are complex transactions that require considerable knowledge. However, for a nonprofit that is not interested in any of those types of transactions, obtaining the ability to accept it as a donation could increase your donor pool and escalate your annual donations.
To learn more or to talk with our team of expert nonprofit accountants, reach out to Chazin & Company to schedule your free consultation.