The Fulcrum in Crypto Donations and the Weight of a Widened Donor Pool

Donations of virtual currency or cryptocurrency, a type of non-fungible token (NFT), seems akin to balancing a seesaw with an anvil of benefits on one side and a bag of pushpins of compliance and risk on the other. Such donations can lead to a sizeable tax deduction for the donor and a compliance conundrum for the recipient. The recipient’s challenge is knowing where to place the fulcrum.

When Vitalik Buterin, creator of Ethereum, donated over $1 billion in cryptocurrencies to a Covid-19 relief fund in India, the recipient decided to gradually liquidate the asset to protect prices in compliance and mitigate against the country’s wariness of cryptocurrency. Unfortunately, as the virus continues to devastate the country, the solution may not be ideal to meet an immediate need.

However, cryptocurrency donations can increase funding for underfunded projects, especially for the underprivileged globally. Nonprofits recognize this ever-changing landscape well. As blockchain use proliferates and crypto adoption increases, so will crypto-philanthropy, and the tax, donor, transparency, and other implications are sure to follow for the charitable giving industry, Amanda Kean, Vice President of Development and Partnership at Wall Street Bound Inc., observed. Wall Street Bound is a 501(c)(3) organization focused on diversifying the finance industry by recruiting and training underrepresented talent.

The potential for a significant charitable deduction, especially on large donations of cryptocurrency, is attractive to donors. For example, U.S. taxpayers can receive up to a 30% tax deduction for donations in-kind made to certain qualified charitable organizations.

Additionally, nonprofits accepting crypto-donations can diversify the global donor pool because donations from countries with unstable monetary systems, which are generally the more under-privileged parts of the world, are made possible. “Crypto provides a simplified international fundraising option as all crypto gifts would be converted to U.S. Dollars, and crypto valuation is generally tracked by a decentralized market,” as Jeremy Scarborough, Associate Vice President of Estate and Gift Planning at the Rutgers University Foundation, noted. However, nonprofits are aware that this increased donor access requires additional vetting procedures, especially on anonymous donations.

For resource-limited smaller nonprofits, international and anonymous donations of cryptocurrency can be especially challenging. In order to navigate the various issues with valuation and other compliance requirements, converting the asset to cash, quickly, is preferred. However, the values of the digital asset may increase significantly and holding the asset may be financially beneficial to the nonprofit.

The cryptocurrency market is risky due to its high volatility and high risk of loss. Investing with cryptocurrency instead of cashing it in may be considered a breach of fiduciary duty. Revisions to the organization’s corporate records and instituting additional compliance protocols would be prudent. Additionally, a nonprofit can use an intermediary to accept the cryptocurrency and manage it instead. The following may be initial considerations for nonprofit best practices.

Should a nonprofit accept cryptocurrency?

The growing donor pool makes this asset especially attractive. The global donor pool may provide funding for more international and underprivileged population-focused causes. The billion-dollar cryptocurrency donation by Buterin illustrates this possible evolution in philanthropy.

Accepting cryptocurrencies through an intermediary, such as a donor-advised fund—which can manage the donation directly—may be more cost-effective. Alternatively, software such as the Giving Block, Charity Engine, and charitable tokens such as AidCoin, built through the Ethereum blockchain, automate and facilitate compliance, transparency, and reporting for nonprofits receiving cryptocurrency donations directly. Large nonprofits are already growing with cryptocurrency donations, and these tools and resources enable smaller nonprofits to benefit in this sphere too.

Is valuation of cryptocurrency overly burdensome?

Valuation of cryptocurrency can be difficult, especially due to its volatility and risk of loss. However, appraisers and valuation experts are familiar with valuing nebulous assets, especially intangibles, even if the methodology may not be perfectly suited. Even though cryptocurrency has a market value that provides related financial data, due to the decentralized nature of the asset, the market values may not be accepted without additional support in a tax audit, and charitable donations made in connection with estate planning may need to be navigated even more carefully due to potential additional audits on the multiple transfers to various asset protection and trust vehicles. Reporting reasonably supported conservative values may be prudent.

What are the first steps a nonprofit should take before accepting cryptocurrency donations?

A tax-exempt nonprofit must, in addition to the general rules applicable to all in-kind donations, such as providing a donation receipt for donations over $250, navigate additional rules on donations of cryptocurrency. Since the IRS classifies cryptocurrency as property instead of currency, the donor would have to file a Form 8283, Noncash Charitable Contributions, to support a charitable deduction over $500 and attach a qualified appraisal if the value is over $5,000. Additionally, the nonprofit may have to file Form 8282, Donee Information Return, if it sells the asset within three years, and the filing could impact the donor’s deduction. However, unrelated business income treatment may not apply on gains realized on sales of cryptocurrency.

Additionally, the nonprofit should consider revising its investment policies and adding criteria for managing donations of cryptocurrency. The nonprofits gift acceptance policy should also detail whether the cryptocurrency should be held or converted and provide approval guidelines. The financial and accounting criteria should be reviewed and updated to ensure that the cryptocurrency is properly reported as an intangible asset. Due to cryptocurrency being held in a digital wallet where access may be easily lost, the nonprofit should also establish protocols for management and oversight to ensure the asset is not embezzled, misused, or otherwise lost.

With proper protocols and procedures in place, and under the counsel of experienced tax and financial advisors, nonprofits can move the fulcrum towards the anvil of benefit to fully balance its compliance and risk against the windfall of opportunity that comes with cryptocurrency donations.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Priya Prakash Royal is the Managing Attorney of the Royal Law Firm PLLC and an established expert in tax law and estate planning. She is also a former IRS Attorney where she examined prominent and high net worth estate and gift tax returns.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.