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. Not-for-profit 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 not-for-profit organizations are still unsure about whether they should accept cryptocurrency donations. Digital currency represents the opportunity to add another source of funding for nonprofit mission and programs, which means organizations will want to be knowledgeable and prepared for donors wishing to use cryptocurrency assets to support their favorite charities.

Here, we’ll address some of the most common questions nonprofits may have about digital assets. 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 are becoming more widely accepted to purchase goods and services online, and they can also be given as donations to nonprofit organizations. Importantly, they are increasingly being used to make charitable contributions, and more and more charities and foundations are beginning to accept 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?

Market volatility is one of the main risks of cryptocurrency. Public charities and private foundations are charged with the fiduciary responsibility of maintaining asset values in a way that will not jeopardize their charitable purpose.  Cryptocurrency is volatile and its value can fluctuate rapidly. If the value of the donated crypto decreases before its conversion to cash, the organization will experience a realized loss on the contribution.

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, if the organization decides to keep the investment, it should consider developing policies, based on the recommendations of experts, about when to hold or to liquidate digital currency and incorporate these recommendations into the organization’s gift acceptance policies. 

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 more susceptible to scams and hackers than traditional investments. Transferring cryptocurrencies is technically complex and transactions, when made, can be irreversible.

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 – through good digital hygiene – 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 a new donor base that does not use traditional methods for their giving. Cryptocurrency donors tend to be more philanthropic than their 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 offered by its transaction methods. Transactions can be handled peer-to-peer instead of going through a bank or other financial intermediary. The transactions are recorded through a distributed ledger called a blockchain. Many types of cryptocurrencies are highly liquid and can be converted instantly into dollars on crypto exchanges. And, 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 use the currency's fair market value as the basis of their charitable contribution deduction similar to publicly traded securities. 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 another public charity such as a sponsoring organization that makes distributions through donor-advised funds (DAF); that option may minimize your administrative responsibilities.  The organization may decide to use a crypto donation processor, or you may decide to receive crypto donations directly. 

If you decide to accept cryptocurrency donations directly, there are options available to assist in processing transactions that require varying levels of expertise from the organization’s staff. Research carefully and set gift acceptance policies that take into account the risk and volatility of cryptocurrency donations.

Next Steps

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.

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