Cryptocurrency has gone mainstream, and if you have been sitting on the fence about accepting donations in virtual currency, it is time to make a decision. But before your non-profit says “yes” to a Bitcoin (or other cryptocurrency) gift, make sure you understand the issues involved — including the risks.
Virtual Currency = Risk
Cryptocurrency refers to a decentralized form of digital currency that is tracked in a blockchain ledger. Unlike traditional currencies, the ledger does not reside with a central authority, such as a bank or government, but across public peer-to-peer networks. The value of cryptocurrencies derives in part from its scarcity. In the case of Bitcoins, for example, the supply is limited to 21 million ‘coins.’
One of the most significant risks related to cryptocurrencies is their price volatility. The price for Bitcoin can shift more than 10 percent in a single day. Imagine a donation that drops that much in value within hours of receipt. Of course, cryptocurrencies also can quickly appreciate in value dramatically. That is one reason owners might want to donate them — to avoid capital gains tax on the appreciation.
Third-Party Facilitators Can Help
Given such price volatility, you need to decide whether your non-profit can assume the risks. One way to manage them is to accept cryptocurrency through a third-party facilitator, such as The Giving Block, BitPay, or Engiven. These platforms allow non-profits to almost immediately convert crypto donations into dollars — before their value can fall.
Facilitators typically charge a small fee, similar to credit card transaction fees. Check with your financial institution before signing an agreement with a facilitator, though. Some are wary of transactions involving players in the virtual currency industry.
If, on the other hand, you decide to accept cryptocurrency donations directly, and perhaps benefit from appreciation, you must create a ‘digital wallet’ through a bank or mobile phone app. Wallets store the public and private ‘keys’ required to send and receive coins. You also will need to implement internal controls and security measures to secure your keys and wallets.
Your Reporting Obligations
When it comes to reporting, the IRS says non-profits should treat these obligations as noncash contributions on Form 990 and, if applicable, Schedule M. You must file Schedule M if you receive more than $25,000 in noncash contributions or contributions of art, historical treasures or similar assets, or qualified conservation contributions.
If you accept cryptocurrency directly and convert it to cash within three years after receipt, you must file Form 8282, Donee Information Return, and give the donor a copy. If the donation is worth more than $5,000, your organization will need to sign the donor’s Form 8283, Noncash Charitable Contributions.
Prepare Now
If you have not yet been approached by a supporter offering a cryptocurrency contribution, it is only a matter of time. So, prepare now. You will need new security and compliance policies and should make a gift acceptance policy addendum. Contact us for more information and help.