New applications for cryptocurrencies continue to emerge at a breathtaking pace. In recent times, there has been a significant increase in the numbers of nonprofit donors looking to make donations in cryptocurrencies, as opposed to other more traditional forms of donation, such as cash or publicly held securities.
The Internal Revenue Service (IRS) considers cryptocurrency noncash property, and donating appreciated cryptocurrency allows the donor to claim a tax deduction without reporting income on the asset’s appreciation in value. While the cryptocurrency markets have hit a rough patch, some long-term cryptocurrency investors have experienced huge appreciation in the value of their assets. Donating portions of their holdings to nonprofits represents an attractive option for these investors.
For nonprofit leaders, it’s become important to explore development of policies and infrastructure to support receiving donations in cryptocurrency. Perhaps new, or existing, donors are already approaching your organization offering cryptocurrency donations, or perhaps you realize the need to proactively invest in building these capabilities for future donations. Regardless, one thing is clear: this issue will only become more prevalent, and it is vital for nonprofit organizations to partner with a trusted accounting firm as they prepare for this option.
Given the push from some donors to give with cryptocurrency, every nonprofit should consider the pros and cons of accepting cryptocurrency donations. That doesn’t necessarily mean every nonprofit is at the right stage of financial maturity to accept these types of donations, or that there is an adequate amount of donor interest in crypto to warrant doing the groundwork it takes to make the shift. Before accepting cryptocurrency donations, nonprofits should ensure they have a robust financial infrastructure in place, with comprehensive policies and adequate board and management oversight and input by accounting and legal advisors.
It’s critical for nonprofits to develop these policies and oversight procedures before they have an active cryptocurrency donation pending. By implementing guidelines around the terms under which nonprofits would accept and manage cryptocurrency donations, organizations can remove emotion from the process of determining whether to accept a pending cryptocurrency donation or not. This ensures all decisions made around cryptocurrency donations are driven by the organization’s overarching fiduciary responsibilities.
Many organizations have existing policies that provide guidance as to how the nonprofit handles noncash property donations. However, in many instances, these are geared toward assets like property, not cryptocurrencies and other digital assets. Working with an experienced nonprofit accounting firm enables nonprofits to update their policies to more accurately reflect the current financial environment.
Nonprofits have the option to directly accept cryptocurrency, which creates additional filing and financial considerations. Alternatively, nonprofits can use third party providers to take possession of the cryptocurrency and liquidate it, ensuring the nonprofit receives the donation in the form of cash. The burden of additional filings and reporting requirements then falls on the third party provider, as they were the entity that took possession of the donation while it was in the form of virtual currency. These third party providers typically charge set-up fees or a commission for this service.
If the nonprofit chooses to directly accept cryptocurrency, the process for accepting, liquidating, and reporting these donations is distinct from other forms of donation. While annual filing requirements like Form 990 are not significantly affected by accepting cryptocurrency donations, nonprofit leaders must be aware of the additional reporting and administrative requirements involved.
To accept cryptocurrencies, nonprofits must set up their own secure wallet: essentially the cryptocurrency equivalent of a bank account. It’s imperative that this is configured by cybersecurity professionals as there are important enterprise risk considerations. It’s also necessary to validate the identity of the donor.
After receiving the donation, most nonprofits will liquidate the asset immediately, although this is not always necessary. Nonprofits with an actively managed mix of diverse investments may opt to hold the cryptocurrency rather than liquidate it. However, due to the volatility of cryptocurrencies, this strategy may not make sense unless the organization is a large nonprofit with well-diversified investment strategies. Nonprofits that continue to hold virtual assets should also be aware of potential international informational filing requirements.
Depending upon the value of the cryptocurrency donated, the donor may be required to obtain a qualified appraisal of the asset’s value in order to deduct the donation for tax purposes. Generally, cryptocurrency donations of more than $5,000 require this and the nonprofit’s signature as recipient on Form 8283. Donors as well as organizations should consult their tax advisors to confirm proper reporting of the gift.
If the organization disposes of the cryptocurrency within three years of receipt from the original donor, the nonprofit generally has 125 days to file Form 8282 with the IRS, although there are some exceptions. The form requires information including donor information, the date the asset was received, the date it was liquidated, and the cash value realized at the time of liquidation. This form is then shared with both the donor and the IRS.
If the nonprofit receives a high volume of cryptocurrency donations, this process can be handled through automated financial technology, with reports submitted on a quarterly basis. For those new to accepting donations in cryptocurrency, it’s important to build the infrastructure required to ensure that all reporting requirements and deadlines are met. Partnering with an experienced nonprofit accounting firm is the best way to ensure this infrastructure is in place.
As cryptocurrencies continue to become more mainstream, more and more donations will take place using cryptocurrency. That represents a huge opportunity for nonprofits who choose to embrace this trend and build the requisite infrastructure.
As adoption grows, a wide range of new use cases for cryptocurrencies is emerging for the nonprofit industry. In the coming years, it’s possible that nonprofits could transact in cryptocurrencies. This industry is expanding quickly and nonprofit leadership teams and boards must remain educated and open-minded in order to be agile to forthcoming changes.
Recent regulation has aimed to provide more standardized reporting requirements for cryptocurrency transactions. The Infrastructure Investment and Jobs Act, passed in November 2021, may require additional forms to be filed with the IRS, but as of this writing, guidance has yet to be published.
The passage of these recent regulations is an indicator that cryptocurrency transactions are on the radar of the IRS, and it’s probable more regulations will pass in the future. Currently, regulatory oversight is occurring at a federal level, but individual states may well pass laws of their own in the future.
Navigating the reporting and administrative requirements that stem from accepting cryptocurrency donations requires the advice and knowledge of a trusted partner.
Smith + Howard is proud to offer a wide range of accounting and advisory services specifically tailored to the needs of large nonprofits. With significant experience assisting nonprofits in satisfying their reporting requirements, our team is honored to support nonprofits around the country in achieving their financial and strategic goals.
If you’re a well-developed nonprofit eager to learn more about accepting cryptocurrency as a donation for your nonprofit, contact us today.
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