Tax-exempt organizations will need to consider logistics, gift acceptance policies, and general best practices if they are interested in accepting cryptocurrency donations, say Crowell & Moring’s Eleanor Moran McWaters and Charles C. Hwang.
An estimated 16% of Americans have invested in, traded, or otherwise used cryptocurrency, and many are now donating their crypto to tax-exempt organizations. In fact, approximately $70 million in crypto was donated to tax-exempt organizations in 2021 through the Giving Block, a crypto processor that focuses on the nonprofit sector. Fidelity Charitable reported that in 2020, 45% of crypto investors donated over $1,000, compared with only 33% of the general investor population (i.e., non-crypto investors).
This charitable trend and the donation of crypto is expected to continue despite recent market volatility. Tax-exempt organizations that are interested in accepting crypto will need to consider logistics of accepting such donations, gift acceptance policies for crypto, and general best practices relating to crypto donations.
Crypto is considered property for tax purposes. A donor may receive a charitable deduction for its fair market value while avoiding recognition of the built-in gain on it, depending on the length of ownership and other facts. As a result, crypto donations and the associated deductions may be advantageous to the donor. It may be equally advantageous for tax-exempt organizations to be able to accept these donations.
That being said, there are several foot faults inherent to accepting crypto. To avoid such foot faults, we recommend that tax-exempt organizations adopt a crypto-specific gift acceptance policy (or include related provisions in any pre-existing gift acceptance policy). The length and depth of the policy depends on the manner in which the organization intends to accept crypto. For example, additional considerations apply if a tax-exempt organization adopts a DIY approach and accepts crypto directly versus if a tax-exempt organization accepts it through an intermediary organization.
The technical expertise, risk, and fees associated with each approach vary. An organization’s obligations to comply with the related reporting requirements also vary. For example, depending on the means of accepting a crypto donation, a tax-exempt organization is to properly acknowledge the gift of crypto, sign Form 8283 as needed, file Form 8282 upon disposition, report any crypto on its annual Form 990, etc.
Organizations may ask donors to donate through a donor-advised fund, such as Fidelity Charitable or Vanguard Charitable; use a crypto processor, such as the Giving Block, which specializes in enabling nonprofits to accept crypto donations; use an “embeddable checkout experience” to automatically convert crypto to cash directly; or accept it directly with a crypto wallet. A gift acceptance policy is crucial for those organizations adopting the latter two approaches and is recommended for all tax-exempt organizations.
Using a Donor-Advised Fund
Under this approach, tax-exempt organizations may direct prospective donors to a donor-advised fund that accepts crypto. This option is only available to public charities and select private operating foundations. The donor may then contribute crypto to the donor-advised fund, which converts the crypto to US dollars or another fiat currency and then contributes the fiat currency to a charitable organization with the advice of the original donor. Through this approach, the tax-exempt organization does not need to set up a virtual currency wallet and does not incur the expense of converting crypto to fiat currency. Of course, such expense will affect the amount that the donor-advised fund would have to contribute to the charitable organization. This may allow the tax-exempt entity to insulate itself from external risks, including fluctuations in value, association with undesirable donors, reputational risk, etc.
Using a Payment Processor
The tax-exempt organization may, alternatively, use a payment processor to accept the donations. It would set up an account with the processor to accept the crypto and would use the processor to subsequently sell it for fiat currency. Purpose-built platforms, such as the Giving Block, are dedicated and designed to accept crypto on behalf of tax-exempt organizations. The use of a dedicated processor removes many of the risks discussed above. Other processors, such as Bitpay or Coinbase Commerce, may also process a crypto donation but are not designed to handle donor-specific questions, gift acknowledgments, etc.
Using a Checkout Experience
Tax-exempt organizations may also use an embedded checkout experience, which is offered directly by crypto exchanges. An embedded checkout experience provides for the automatic conversion of crypto to cash and may be embedded directly onto the organization’s fundraising platform. This allows the organization to accept the donation and dispose of the crypto automatically and is less expensive than using a processor or using a donor-advised fund. This avoids the issues associated with holding potentially volatile crypto. The organization must comply with all other requirements, including gift acknowledgments, Form 990, etc.
Using a Digital Wallet
Lastly, tax-exempt organizations may accept crypto directly from donors without any form of intermediary. This option requires technical expertise. Of note, some donors may request that the organization accept the crypto directly. Other donors may request that the tax-exempt organization hold the crypto for a set amount of time. We recommend that all such considerations be addressed in a gift acceptance policy.
We recommend organizations contemplate and include provisions addressing the following questions:
The tax-exempt organization may want to add provisions relating to IRS requirements, including gift acknowledgments, Form 8283, Form 8282, etc. Organizations should always advise donors that the tax-exempt entity is not providing tax advice to the donor. For that reason, a gift acceptance policy may provide information regarding the tax-exempt organization’s procedure for gift acknowledgments and related forms.
The tax-exempt organization also may want to consider a specific crypto gift acknowledgment letter that specifies the crypto donated. The organization is not required to value the crypto. However, upon disposition of the crypto, if within three years of the gift, the tax-exempt entity is required to complete Form 8282, which identifies the price received upon disposal—which may bear on the value of the crypto on the date received by the organization— and to provide a copy of the Form 8282 to the original donor.
Several additional considerations apply following acceptance, including select reporting requirements. Complying with such reporting requirements will be less of a headache if organizations proactively prepare for crypto donations. Organizations should consider adopting a gift acceptance policy and prepare internal policies for the acceptance, the holding, and the disposal of cryptocurrency.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Eleanor Moran McWaters is an associate at Crowell & Moring LLP. She specializes in advising tax-exempt organizations.
Charles C. Hwang is a partner at Crowell & Moring LLP. He is a transactional tax lawyer whose practice includes advising tax-exempt organizations.
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