Several years ago, when cryptocurrency was still a novel concept, many not-for-profits chose not to accept this type of donation. Now, crypto is so ubiquitous that it’s difficult — and probably a mistake — to refuse it. Yet it remains a risky and even unstable form of currency. Here are a few things to think about when accepting these donations.
The Basics of Cryptocurrency
Cryptocurrency refers to a decentralized form of digital currency that’s tracked in a blockchain ledger. Unlike traditional currencies, the ledger doesn’t reside with a central authority, such as a bank or government, but across public peer-to-peer networks. The value derives in part from their scarcity. In the case of Bitcoin, for example, the supply is limited to 21 million “coins.”
One of the most significant risks related to cryptocurrencies is their price volatility. Although Bitcoin has enjoyed periods of lower price volatility than even the S&P 500 index, it’s also capable of shifting in value more than 10% in a single day. Imagine a donation that drops that much in value within hours of receipt. Cryptocurrency prices can also shoot up rapidly.
Big price gains is one reason some owners choose to donate crypto holdings to charity — to avoid capital gains tax on the appreciation. But there are other benefits. Most traditional electronic donation apps charge transaction fees, but donors can avoid them by gifting crypto. The result: More money is available to serve your mission. Also, using the blockchain makes record-keeping easy, and without the hassle of currency exchange, global donors may be more likely to give to your not-for-profit.
Given crypto’s price volatility, you need to contain the risks of accepting it. One way is through a third-party facilitator, such as The Giving Block, Engiven or Bitpay. These platforms allow not-for-profits to convert crypto donations into dollars — before their value can fall. However, they typically charge a small fee, similar to credit card transaction fees.
If, on the other hand, you decide to accept these 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. Be sure to implement internal controls and security measures to secure your keys and wallets if you go this route.
When it comes to reporting, the IRS says not-for-profits should treat crypto donations as noncash contributions on Form 990. 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’re required to 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.
When it comes to accepting crypto, don’t sit on the fence. Most not-for-profits benefit when they accept donations in whatever form supporters want to contribute. However, you’ll need to establish gift acceptance policies and vet any facilitator or service you want to work with. Contact us for help.
To learn more about how PKF Texas serves not-for-profit organizations, visit www.PKFTexas.com/NotForProfit.