It’s a question many nonprofit executives and their boards may be asking as they encounter potential donors wishing to make their contributions with Bitcoin. Within the nonprofit sector, organizations such as Greenpeace and The Water Project have recently announced that they are accepting Bitcoin donations. However, the digital currency’s use is still very much in early adoption phase. Organizations that currently accept Bitcoin donations tend to do so in order to outwardly support innovation, appeal to their tech-savvy donor bases and give their donors a low cost option for making donations.
For background, Bitcoin is a digital currency—also known as “cryptocurrency.” Essentially, those who buy Bitcoins assume that the currency is worth something, and its value subsequently fluctuates based on supply and demand. That being the case, Bitcoin is not controlled or backed by any central authority or sovereign government. The supply of Bitcoins and all transactions are instead controlled on the currency’s peer-to-peer network. Still, Bitcoin exchanges exist, which can easily convert the digital currency into most national currencies.
The process for accepting Bitcoin donations is reasonably simple. An organization creates an account with a third-party processing company (e.g., Bitpay or Coinbase), and then ncorporates the payment option into its online donation portal. With this system in place, organizations can accept incoming Bitcoin donations and then exchange them at the time of a transaction, if desired, for legal tender via third-party processors.
One benefit of accepting Bitcoin donations—as opposed to credit card transactions—is that Bitcoin transaction fees are notably lower. For example, some third-party processors will process and convert donations for eligible U.S. 501(c)(3) organizations listed in the Internal Revenue Service (IRS) Publication 78 at no charge. Also, there are no exchange rate complications with which overseas donors must contend when contributing to a cause.
Still, there are notable risks and uncertainties around virtual currency, especially when it comes to tax and accounting issues. As nonprofits contemplate whether or not to accept Bitcoin donations, they should first understand the following financial accounting and reporting risks, as well as unique tax issues, that come with this nascent technology. Failure to do so could result in serious financial consequences down the road.
Financial Accounting and Reporting Risks
When it comes to managing the financial risks associated with virtual currencies and ensuring that all donations are accurately reported, management teams and Boards should be keenly aware of the following areas of concern:
- The value of virtual currencies is highly volatile;
- These currencies are not backed or regulated by any sovereign government, including the U.S. federal government; and
- There are widely-publicized reports of asset losses at exchanges.
One way to mitigate the risk of market volatility currently associated with Bitcoin is to have donations converted to cash immediately through an agreement with the third-party processing vendor of your choosing. If an organization decides to accept Bitcoin for charitable donations, a best practice is to modify its gift acceptance policy accordingly, and if appropriate, include its intention to immediately convert these donations to cash.
For financial reporting purposes, Bitcoins should be treated as a financial asset, and if held, should be reported at fair value in an organization’s statement of financial position and in the notes to the financial statements It is reasonable to expect that the fair value would be determined based upon the trading price of the Bitcoin on the applicable exchange on the date of the transaction.
Along with deciding whether or not to hold Bitcoin donations or convert them to cash immediately, it’s also critical that management and the Board understand how Bitcoins are valued, and how the third-party vendor safeguards them. The controls in place at exchanges and other locations that house Bitcoins for customers are important to ensuring that Bitcoins continue to exist. Once Bitcoins are lost, they are not recoverable, and unlike deposits held at a bank, they are not insured against loss by the government.
A sound understanding of the valuation and existence of Bitcoins is essential to accounting for the transactions and reporting Bitcoin for financial reporting purposes. Of course, Bitcoin is, for the most part, unregulated, and changes in laws or regulations could significantly impact its value, which could cause changes in market sentiment and liquidity.
There are also notable tax considerations that nonprofits should understand prior to accepting virtual currency donations. Bitcoin doesn’t have legal tender status anywhere in the U.S. or with any other sovereign government at this time, and the IRS has classified the currency as property for federal income tax purposes. See IRS Notice 2014-21. With that in mind, whether a nonprofit is accepting Bitcoin donations or allowing services or goods to be purchased with Bitcoin, they should be aware of the following tax reporting requirements:
Rules regarding donations of property: The Internal Revenue Code makes a distinction between how gifts of property to a charity are treated versus gifts of cash. Various factors come into play, such as whether the gift is to a public charity or a private foundation, the use of the property, whether the donor held the property for more than 12 months, the type of property or whether the property is a publicly traded security, and the fair market value of the property on the date of donation.
In the case of gifts of property to a public charity, the donor may be eligible for a full fair market value deduction for appreciated long-term capital gain property. Gifts of property to most private foundations other than securities, where quotations are readily available on an established securities market, do not receive such generous tax treatment.
A charity must sign a donor’s Form 8283 in order for the donor to receive a charitable deduction if the property is valued at $500 or more. For gifts over $5,000 that are not publicly-traded securities, fair market value must be substantiated. It is our understanding that, at this time, Bitcoin is not considered a publicly-traded security, and therefore the question arises whether an appraisal is needed, or if there are market quotations readily available (see Regulations section 1.170A-13(c)(7)(xi)(B)) that would make an appraisal unnecessary. Although the IRS notice does point to the fact that virtual currencies are listed on exchanges, this point may need clarification.
Also, as part of signing the Form 8283, the charity is promising that it will file Form 8282 if the property is sold within three years. The reason for the follow-up Form 8282 is to catch situations where the donor’s deduction was significantly higher than the amount for which the property was subsequently sold. In that case, the IRS might follow up to see why there was such a large discrepancy. It is the donor’s responsibility to value the property — not the charity’s — and as a best practice, the nonprofit should refrain from doing so.
Don’t forget that if a nonprofit accepts Bitcoin for the purchase of a ticket to one of their fundraising events, such as a gala, the same rules would apply as if the patron had used cash or credit. The charity is required to provide a written disclosure of the goods or services that have been received if the payment is in excess of $75.
So, what does this mean for a charitable gift of Bitcoin, especially in the event that the charity immediately translates the Bitcoin donation into cash? Would the donor making a Bitcoin gift of over $500 still be required to have the charity sign the Form 8283? Would the charity have to file Form 8282, even if it immediately converts the Bitcoin to cash? These are all questions that the IRS still has yet to answer.
Other tax rules for goods or services: The IRS Notice provides that “a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received.” It is, therefore, important that transactions be reflected at fair value, especially if the goods being sold or the services being provided would create unrelated business income (UBI). In addition, these transactions are subject to all of the normal tax rules regarding sales tax, information reporting and withholding.
Selling Bitcoin that a nonprofit holds: The good news is that if an organization holds Bitcoin and sells it at a gain, there should not be any taxable income, since the IRS treats Bitcoin as property, and sales of property that are not inventory or stock in trade are excluded from UBI, regardless of how long the charity holds the property.
As the use of Bitcoin continues to grow, it’s critical that organizations understand best practices of accepting donations in virtual currency. If your organization is considering whether or not to accept such donations, we encourage you to consult an experienced advisor to navigate these complex and evolving rules, and to help you make the best possible decision.
Contact Smith & Howard’s Nonprofit Accountants
Have questions on whether you should accept Bitcoin donations or simply looking for guidance from one of the top nonprofit accounting firms? Contact Paul Aktinson at 404.874.6244 and or simply fill out our form below and we’d be glad to help.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.