Should Your Nonprofit Accept Cryptocurrency Donations?
With a current total market cap of all cryptocurrencies now exceeding $2 trillion dollars, nonprofits who refuse to accept, or do not have adequate policies in place for accepting crypto donations may be missing out on a large and growing funding stream. While accepting crypto donations may seem like an unwanted headache for nonprofit organizations, the process is not as daunting as it once was as crypto has continued to move into the mainstream of finance. AAFCPAs has highlighted below some of the ways nonprofit organizations can accept and benefit from these donations.
What Exactly is Cryptocurrency?
In its most elementary definition, cryptocurrency is a digital asset that functions like currency, but as a digital asset, it does not have a central regulatory agency. Their value is derived the same way that securities gain their value, i.e., scarcity, demand, or the crypto’s utility.
The IRS has determined that cryptocurrency will not be treated as a cash but rather property, in the same way that securities, bonds, and land are treated. While this value can be quite volatile, therein lies the benefit for nonprofits, who can reap the benefit of the appreciation, whilst saving the donor from the tax on the appreciation and providing them with a charitable deduction. If donated to a charity, it is considered a noncash contribution.
How to Accept Cryptocurrency Donations.
If your nonprofit has now decided to accept crypto donations, or revamp their procedures, there are many ways to go about it.
Have the donor use their Donor Advised Fund
If the donor has an existing donor advised fund that accepts cryptocurrency, the donor can transfer the crypto that they wish to donate to the fund. The donor advised fund will liquidate the asset and then transfer the cash to the nonprofit. With this method, the nonprofit never takes possession of the cryptocurrency and does not have any additional filing requirements as they are merely receiving a cash grant.
Outsource the Process to a Third-Party
Another option for a nonprofit to accept cryptocurrency donations would be to use a third-party. Many nonprofits use this option where they have a third-party exchange that receives, holds, and can sell the cryptocurrency or even hold it as an investment. These services are a good option for organizations that do not have the staff to manage a crypto donation process internally.
Manage Cryptocurrency Donations In-house
Should the nonprofit organization wish to run their own cryptocurrency program inhouse, the organization will need to obtain their own wallet. The wallet is somewhat analogous to a bank account. The wallet receives the donated crypto from the donor. The organization then has possession of the crypto and can immediately liquidate it or hold it as an investment. The advantage to this approach is that the fees will be lower for the process. This option should only be undertaken if the organization has the technical knowledge inhouse.
IRS Filing Requirements
As cryptocurrency is considered property, and not cash, a donation that the nonprofit takes directly will require the same filings as any other noncash contribution. For donations of over $5,000 in crypto the nonprofit organization will also need to sign the IRS Form 8283. It is important to note that the nonprofit organization is not attesting to the value of the crypto donated, it is merely attesting that they are a tax-exempt organization, received the contribution on a specific date, and understand the filing requirements.
The donor will need to obtain a qualified appraisal by a qualified appraiser for the donated cryptocurrency, should it be over $5,000. While there is no official appraisal designation for cryptocurrency appraisals, there are several organizations who do offer cryptocurrency appraisals.
Should the nonprofit organization sell the cryptocurrency within three years of receipt, and the cryptocurrency is valued at over $500, the nonprofit is required to file Form 8282 within 125 days of disposition.
AAFCPAs’ Tax Consulting Attorneys will cover this topic and more at AAFCPAs’ Annual Nonprofit Educational Seminar, which is virtual again on April 26th, 2022. Visit aafedu.com to learn more and reserve your seat.
If you have questions, please contact: Christopher Consoletti, Esq. at 774.512.4180, email@example.com; or your AAFCPAs Partner.