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What Nonprofits Need to Know About Cryptocurrency

What Nonprofits Need to Know About Cryptocurrency

It seems like a week doesn’t go by these days without a client or prospective client asking about cryptocurrency.  Can my nonprofit accept donations of crypto?  Can we invest in it?  Let’s try and shed some light on this very relevant topic.

Nonprofits and crypto.  Interest in this topic has been steadily rising for years.  Some people are terrified of it, most don’t understand it, and a few brave pioneers are convinced it’s the future of money.  But no matter which camp you fall in, everyone in the nonprofit space wants to understand how it all affects their 501(c)(3).

Donations of Cryptocurrency

The first question I’ll tackle is whether or not a charity can accept donations of cryptocurrency.  This answer is an easy one, and it’s “yes”, it can.  Nonprofits can accept donations of pretty much anything, so long as that “anything” is legal, and cryptocurrency is legal.  Most of it, anyway.

Cryptocurrency is NOT Currency

Here’s an important fact to know:  Cryptocurrency may be legal, but it’s not currency, i.e. legal tender, at least not in the eyes of the IRS.  Digital currencies are actually considered property.  The rules around donations of Bitcoin, Ethereum, XRP, etc., whichever one you’re talking about, are the same as if you were donating a box of used clothing to Goodwill.  It’s considered an in-kind gift, not a gift of cash, or cash-equivalent security, like stocks or bonds.

Acknowledging Donations of Cryptocurrency

Because of this, nonprofits that receive a gift of crypto cannot state a value on the donor receipt, just like Goodwill won’t value your gift of clothing for you.  The acknowledgement statement a nonprofit gives the donor must simply state when the gift was made, what it was (and in what quantity), and a “thank you”.  It’s up to the donor to substantiate the valuation on their own tax return, should they choose to claim a tax deduction.

For the charity, the book value of the gift is the fair market value on the day it was donated.

Investments In Cryptocurrency

The other question we get is whether or not a charity can invest in Bitcoin or some other cryptocurrency.  Again, the answer is “yes”, but it’s a very qualified yes.  Every state has adopted a law called the Uniform Prudent Management of Institutional Funds Act.  This Act requires charities, trusts, and anything or anyone else with fiduciary responsibilities to consider the risk/return spectrum of the entirety of their investment portfolio and invest “prudently”.

So what does this mean for investments in crypto by a nonprofit?  It’s not disallowed, but their extreme volatility means most charities won’t hold much cryptocurrency as a percentage of their overall portfolio in order to maintain a balanced risk profile.  Holding too high of a percentage of a nonprofit’s invested assets in these digital currencies runs the risk of violating state law.

Should You Immediately Sell Donations of Crypto?

Which leads me back to close the loop.  The final question we get is whether or not the charity should immediately sell donations of cryptocurrency.  Most charities, in fact, do just that.  And the reason has everything to do with protecting the value of the donated asset and not risking the possibility that it could rapidly plummet in value.  So, get a gift of Bitcoin, then sell it immediately, right?

Well, maybe or maybe not.  Again, you have to consider the prudent funds management rule.  A small holding of crypto won’t violate that rule.  Another factor to consider is donor intent.  The Act specifies that charities have a responsibility, to the extent legally possible, to honor donor intent as to their gift.  For example, if a donor gifts cryptocurrency and wants the charity to keep that gift as a crypto-based endowment, the charity can do so and still be within the boundaries of the law.

Conclusion

Digital currencies are still in their infancy.  It remains to be seen if they are ever a reliable investment asset, much less a means of exchange.  Governments are playing catchup with a rapidly moving target.  What’s safe to assume, however, is that these tokens are not going away.  And, at some point, it’s highly likely your nonprofit will be presented with a situation of accepting a donation of cryptocurrency.  Knowing what you can and cannot do, and how the rules are evolving, is critical to being ready to deal with it when the time comes.

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Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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