Are You Ready For Some Crypto?
You have probably heard of it, but you may have never seen it. You may own some, but you’ve likely never used it to purchase anything. And the odds are your nonprofit organization has never received any as a gift, but you just might within the next three to five years.
I’m talking about cryptocurrency. There are more than 100 different forms of cryptocurrency, but the top three are bitcoin, XRP and Ethereum, representing over $100 billion in combined market capitalization. There is a lot of misunderstanding about cryptocurrency — what it is, how to use it and where it comes from. I think many people think of it as a “black web” currency that you need to have when someone hacks your data and wants to sell it back to you. But the fact of the matter is that cryptocurrency has become a legitimate form of payment for goods and services, including charitable contributions.
In 2016, Fidelity Investments received $7 million in cryptocurrency contributions to its donor-advised funds. Just one year later, in 2017, that number had increased by over 800% to $69 billion. It was the fastest growing asset being contributed to donor-advised funds — even faster than the traditional cash and stocks.
In 2018, blockchain company Ripple donated $29 million in cryptocurrency to fund teacher requests on Donorschoose.org, and the Pineapple Fund has contributed cryptocurrency to more than 60 different organizations. The point is, you may not be soliciting it, but donors may soon choose to give it to you anyway. The question is, are you ready to accept cryptocurrency?
There are several steps you should take, in advance, to prepare your organization for cryptocurrency.
Like all offered donations, you have the right to refuse the contribution. So, at the board level, you need to decide if you are going to approve a policy of accepting cryptocurrency — and not just if you will accept it, but under what conditions.
For example, one of the unique characteristics of cryptocurrency is that it can be exchanged completely anonymously. Are you willing to accept contributions of cryptocurrency from a donor whose identity you cannot know? What if the donor turns out to be a criminal or terrorist? Do you still want that money? If the cryptocurrency was the result of illegal activity, it could possibly be subject to a “clawback” by law enforcement. It may sound like a philosophical question, but when dealing with cryptocurrency, your acceptance policy will have real-world implications.
2. Understand the tax implications of cryptocurrency.
If you are going to accept cryptocurrency, you will need to understand how it is valued from an IRS perspective. Despite the tag “currency,” cryptocurrency is not considered money, as far as the U.S. government and IRS are concerned.
Cryptocurrency is considered property, meaning that when you accept it, the rules are the same as if someone gave you a car, a piece of land or a work of art. The donor must complete Form 8283, and the charity must sign it. And there must be an appraisal. This can be easy if the cryptocurrency is listed on an exchange like Coinbase, but it can become much more complex if it is not.
3. Have a policy in place before you receive a cryptocurrency gift.
What are you going to do with cryptocurrency when you receive it? Many organizations have a policy of selling donated assets as soon as they can — especially with stock and bonds. You can have that same policy with regards to selling cryptocurrency.
Conversely, you may choose to hold on to it as an investment. A board-approved policy, probably stemming from a recommendation from your finance or investment committee, on how all cryptocurrency donations will be handled is a good idea.
4. Be ready to accept, hold and sell cryptocurrency.
Just as with donated stocks, you need a special type of account to be able to accept, hold and sell cryptocurrency. It is not likely that your current bank or brokerage firm is equipped to handle cryptocurrency. You can typically set up an account to accept and hold cryptocurrency for free, but there may be a small charge when buying or selling.
A good practice is to set up an account in advance so that there is not a delay if a donor approaches you with a cryptocurrency gift. You may or may not want to promote that you have this capability, depending on how much you want to encourage such gifts, but you should be prepared to handle a cryptocurrency gift should it come along.
We all have different comfort levels with technology and how cutting-edge we are willing to live. Regardless, cryptocurrency is a growing form of charitable contribution. Nonprofit leaders need to proactively determine how their organizations plan to handle cryptocurrency gifts to avoid making arbitrary or “emergency” decisions when dealing with donors. By taking these steps, your organization will be proactively ready for the wave of future gifts.