Despite the recent plunge in the cryptocurrency market, and predictions that cryptocurrency prices could fall even further before any sustained recovery, interest in cryptocurrency remains high. It is therefore not surprising that nonprofits have seen an increase in donors exploring opportunities to make cryptocurrency donations to their favorite charities.
In this new giving environment, what do nonprofits need to consider before making the decision to accept such contributions?
TAX REPORTING REQUIREMENTS
From a tax perspective, cryptocurrency donations are treated as donated property to nonprofit organizations.
If a nonprofit organization receives cryptocurrency with a value greater than $5,000, Form 8283 should be completed by the donor, which normally requires an appraisal. The nonprofit organization will be asked to sign the form to certify receipt of the donation. It is also worth noting that the individual donating the property must have held the cryptocurrency for at least one year in order to obtain a proper fair market value of the donation. If it was held for less than one year, the donor may only report the lesser of their cost basis or fair market value.
If a nonprofit sells its donated cryptocurrency within three years of receipt, they will need to file Form 8282. This form lets the IRS know how much the donated property was sold for in order to value the transaction appropriately.
It is important to let donors know of these requirements and potential restrictions when they are considering making such donations.
ACCOUNTING CLASSIFICATIONS
From an accounting standpoint, cryptocurrency is classified as a non-financial intangible asset and grouped with other intangible assets on the statement of financial position.
When a contribution is received, a nonprofit records the non-financial asset at its fair market value at the time of donation. Because it does not expire, cryptocurrency is presumed to have an indefinite life. As such, no amortization is taken, and the organization must annually evaluate the cryptocurrency for impairment. If impairment exists, the asset must be written down; however, it is important to note that it cannot be subsequently written back up.
Most internal contribution policies, as they are currently written, do not address the acceptance of cryptocurrency. Nonprofits should evaluate and update their gift acceptance policies to address these specialized donations.
PUTTING IT INTO PRACTICE
Although the volume of cryptocurrency donations is increasing, many banks will not yet accept this type of currency. There are a few ways that a nonprofit can accept such donations even if their bank will not:
- Nonprofits may accept the donations directly through a cryptocurrency donation processor.
- Nonprofits may accept the currency through an intermediary 501(c)3.
- Nonprofits may use an embedded checkout process directly through their website.
Cryptocurrency donation processors can convert cryptocurrency donations directly into cash, automate receipts and even accept donations into the organization’s cryptocurrency wallet. These processors also sometimes offer to help with marketing and fundraising efforts.
If the nonprofit does not want to accept cryptocurrency directly, it can use an intermediary 501(c)3, such as a donor-advised fund. Such an approach allows nonprofits to accept cryptocurrency donations without actually taking custody of the asset.
Finally, there is the option of using an embedded checkout cryptocurrency exchange, which tends to be the most cost-effective option. However, as the cost-effective choice, it is important to note the burden of donor information collection and that tax reporting falls back on the nonprofit.
With the rise of cryptocurrency, navigating this new environment can be a challenge for nonprofits. Please contact GHJ’s Nonprofit Practice to learn more about this topic.
