Should charities accept crypto donations?

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Cryptoassets are growing in popularity exponentially, digital currency donations to nonprofits and foundations are becoming more common. As generous and potentially impactful as these offers may be, acceptance of crypto donations should be carefully assessed with expert help and, ideally, buy-in from all levels of your customers’ organization.

While you’ve probably heard of bitcoin, it’s just one of over 10,000 virtual currencies. In 2021, we have seen steep rises and falls for many of these crypto-assets, the value of which tends to be extremely volatile. Some wealthy people who have profited from it seek to dispose of their assets without having to pay taxes on the capital gain: to do good without declaring costly gains. Yet when it comes to donating cryptocurrency to nonprofits and foundations, discretion is the best part of bravery as this concept is still in its infancy.

Evaluate the benefits of crypto donations

The Internal Revenue Service classifies donated cryptocurrency as property, not currency. This means that donors can avoid capital gains by making an in-kind donation. As with any other complex gift your customer may have received, documentation and risk assessment are paramount. A third party organization can be helpful in valuing these assets.

Here are some other high-level considerations:

What are the risks associated with accepting a potentially volatile asset? Will your customer incur additional operating costs or complexities in trying to meet this new type of demand? Does it make sense to sell the cryptoassets immediately or keep them as part of your clients’ investment portfolio?

Answering these general questions means digging deeper into and consulting with experts on the legal and operational aspects of a crypto donation.

Crypto donation checklist

Here are five factors to consider in helping your foundation and nonprofit clients decide whether or not to accept in-kind donations of crypto assets:

Policy and governance Who among your clients’ staff is involved in the decision-making process? Has your client notified the board of directors and sought their advice? Does your client have procedures in place to document the discussion of gift acceptance and investment policies? Ethics While not all cryptoassets are energy intensive, the environmental impact of mining digital currency is worrying for some. If your clients’ mission is focused on climate change, the ethical angle may be worth considering. If your client is concerned about the track record of a donor offering a large sum of crypto-assets, consult attorneys who specialize in anti-corruption reviews. Investments Do your customers have the instinct to immediately liquidate a crypto donation and use the resulting money for programming, operating expenses, etc. ? Or is it attractive to hold it for possible future appreciation, with the caveat that losses could be just as likely as gains over time? Your clients’ investment committee and your financial advisor should be part of this conversation. Would your customer use a cash donation to purchase bitcoin or other virtual currency? Otherwise, holding crypto in your investment portfolio might not be the right decision. Marketing development of a crypto acceptance program could alert donors that your nonprofit clients have done their homework, built an infrastructure to accept crypto, and know the tax benefits for donors. Opening up to crypto donations could attract younger donors, who might be more likely to have crypto holdings and recognize the benefit of offsetting gains made between those assets. Keep in mind that donors who are considering offering digital currencies will need a qualified appraiser to document the value of the cryptos. Operations Cryptocurrencies are held in digital wallets, accessible with a password known only to the owner. Unfortunately, passwords are easy to lose or forget. It is estimated that 20% of the value of all bitcoin is lost and possibly unrecoverable due to owners forgetting passwords. Considering the healthy turnover of many nonprofits, having a rigorous protocol in place for maintaining and recovering passwords is essential if your client intends to build their own wallet. In terms of IRS reporting requirements, crypto donations must be disclosed as non-cash contributions.

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