Did you know that by the end of this year, the number of global cryptocurrency users is expected to reach one billion? Digital assets—such as bitcoin and Ethereum—are skyrocketing as a hot commodity, and more people than ever are investing in them. And nonprofit organizations are getting in on the action. According to an annual report, cryptocurrency donations jumped from $4.2 million in 2020 to $69.6 million in 2021.
However, despite the rising popularity, there is still a lot of confusion about what cryptocurrency is and how it works. As a result, many nonprofits are still unsure about whether they should accept cryptocurrency donations. With a massive percentage of the world's population jumping on board with digital currency, these organizations must determine their processes soon.
Here, we’ll address some of the most common questions nonprofits may have about cryptocurrencies. We will discuss the risks and benefits of accepting these digital assets, the IRS requirements for cryptocurrency and the internal controls needed to handle transactions.
What is Cryptocurrency?
Cryptocurrency is a virtual currency using cryptography to secure transactions. Cryptocurrency is decentralized and not subject to governmental or financial-institution control. Bitcoin, the most well-known cryptocurrency, was created in 2009. Since then, thousands of different cryptocurrencies have been created.
Cryptocurrencies can be used to purchase goods and services online, and they can also be given as donations to nonprofit organizations, with an increasing number of nonprofits accepting cryptocurrency donations. Before accepting this new form of donation, however, there are a few things that organizations need to keep in mind in order to ensure compliance and security.
What are the Risks of Cryptocurrency?
One of the main considerations your organization needs to attend to is whether it is willing to be exposed to market risk. Cryptocurrency is a volatile asset, which means its value can fluctuate rapidly. If the value of the donated currency decreases before it can be converted into cash, that could lead to considerable loss for your organization.
As a result, it is generally advisable to convert digital currency donations into cash as soon as possible, which can be accomplished through exchanges and other service providers. Alternatively, your organization should consider developing policies about when to liquidate digital currency holdings depending on market conditions, organizational needs, donor restrictions and other factors.
Another significant risk is the possibility of fraud and the need to ensure safekeeping of the digital assets. Because neither a governmental or a financial institution regulates or backs cryptocurrencies, they are susceptible to scams, such as fake exchanges. If cryptocurrency is stored in an online wallet (often referred to as a “hot wallet”), your organization risks the loss of the private keys due to hacking. Strengthening your processes and controls over the storage of cryptocurrencies held in wallets is essential if your organization accepts digital assets as a form of donation. This may include managing private keys and revoking access to keys, wallets and exchanges when employees quit or are terminated.
It's also important to remember that with digital assets continuously evolving, governmental regulations could eventually change the stability and value of the currency.
What are the Benefits of Cryptocurrency?
One of the enormous benefits of accepting cryptocurrency is that it will help attract new donors who might not otherwise support your cause. Cryptocurrency donors tend to be more philanthropic than their traditional counterparts, with nearly half of cryptocurrency owners making donations of $1,000 or more to charity in 2020.
A benefit to accepting cryptocurrency is the transparency it offers in terms of donations coming in. When a donation is made using bitcoin or another type of cryptocurrency, the transaction is recorded on a public ledger called the blockchain. Anyone can see how much cryptocurrency was donated and where it went. But, the system also retains the ability for donors to remain anonymous, which may be an advantage for those who don’t wish to have their names attached to their donations.
Another advantage: cryptocurrency donors can bypass taxes on profits for held assets, and potentially qualify for a tax write-off when itemizing their taxes.
IRS Requirements for Cryptocurrency Donations
Since 2014, the IRS has treated virtual currency as property. If a taxpayer is donating virtual currency, they may deduct the currency's fair market value at the time of its donation, similar to stocks, as long as they meet certain criteria. According to CNBC, donors qualify for the fair-market-value deduction for cryptocurrency donations as long as the currency has been held for more than a year, and profitable assets can be taken for up to 30% of the donor’s adjusted gross income.
For nonprofits, the IRS holds the following requirements when it comes to digital asset donations:
- A charitable organization can provide written acknowledgment for a cryptocurrency donor claiming a deduction of $250 or more.
- A charitable organization must sign Form 8283 for donations over $5,000 and sign Form 8282 within three years of exchanging, selling or otherwise disposing of a cryptocurrency donation.
How to Manage Cryptocurrency Donations
At first, the technicalities of cryptocurrency may seem daunting and confusing. However, accepting cryptocurrency donations is quite simple — all you need to do is choose the right platform for your organization. There is a wide range of options available, so it's essential to take the time to research which one will work best for your organization.
Your organization may decide to utilize cryptocurrency support through a donor-advised fund (DAF) which minimizes your legal, accounting and administrative responsibilities. Or, you can create an organizational cryptocurrency wallet, allowing you to accept donations through a payment processor or directly from donors.
If you decide to accept and hold cryptocurrency donations directly, you must have knowledgeable staff on hand overseeing all aspects of the process. These staff members should track transactions, collect donor information and put controls in place to safeguard the assets. They will also need to keep an eye on the trends and patterns of the digital asset market.
When deciding whether to accept cryptocurrency donations, nonprofits must weigh both the risks and rewards to make informed decisions that are right for their organizations.
At CBIZ, we have a team of experts who can help your nonprofit organization integrate digital assets into your development strategy. If your organization is looking to allow donors to support you in virtual currency, contact us today to learn more.
Published on September 23, 2022