By Justin Greene, CPA
Today’s world can be defined by constant change driven forward by technological advances. Artificial intelligence, Web3 and the metaverse were fairly fringe topics of discussion not long ago, and none more so than cryptocurrency. Bring up the word “crypto” in any conversation these days and you’ll get polarizing answers ranging from a criminal’s tool to the future of money, from pure speculation to the perfect store of value rivalling gold.
No matter what your position, cryptocurrency is being recognized by governments, accepted as a form of payment, added to balance sheets, bundled with traditional investment options, and used as a method for charitable giving. Just like electronic giving altered the charitable giving landscape over the last decade or so, digital assets have the potential to do that exponentially faster.
Fidelity Charitable, a 501(c)3 that manages one of the largest donor-advised funds in the United States, reported cryptocurrency donations to their fund increased from $28 million in 2020 to more than $331 million in 2021 — an almost 1,100% increase. A 2021 study by Fidelity Charitable on Cryptocurrency and Philanthropy stated that 35% of millennials now own cryptocurrency and another 33% indicated they were somewhat likely to consider it in 2022. While we have seen adoption across all age groups, this indicates a higher likelihood for digital methods of generosity with future generations.
According to James Lawrence, cofounder and CEO of Engiven, a leading cryptocurrency donation management platform, “Cryptocurrency philanthropy is quickly becoming the fastest growth segment in the digital giving space and one of the most compelling. In 2021 on the Engiven platform, we saw an average cryptocurrency donation of $15,000+ and many crypto gifts in the six and seven figure range, and the number of nonprofits added to the platform increased by 1,650%. We’ve been fortunate to have helped many nonprofits such as The Salvation Army, U.S. Figure Skating, and Compassion International reach new donors in an innovative way. We’re now seeing donors with appreciated crypto assets making impactful donations across the full spectrum of nonprofit missions.”
For many nonprofits, the uncertainty surrounding cryptocurrency is a major drawback to accepting it for their organization. As leaders, gaining an understanding is an important first step, not only for your own level of comfort in the technology but also so you can be knowledgeable when communicating with donors. Here is a very brief overview of blockchain and cryptocurrency before we dive into what nonprofits should do to get started.
To understand cryptocurrency, you need to understand the technology behind it. A blockchain is a digital ledger made up of records called blocks. Each block contains data, such as financial transactions, that has been verified, and references the block before it. These blocks are connected via a cryptographic hash, which is what puts the “crypto” in cryptocurrency. Through cryptography, a chain of blocks (records) are created that are immutable or extremely difficult to alter. Blockchains can be decentralized (not controlled by a central organization) and also distributed (every node has a copy of the ledger and verifies new entries). Industries such as health care, supply chain, and finance are using the advantages of this technology, bringing trust and accountability to their data, lowering costs of transactions, and providing faster settlement of payments.
Cryptocurrency is a fungible, digital asset that acts as a store of value and a medium of exchange. Fungible means they are mutually interchangeable and able to be replaced by identical items, so you can swap one token for another, and you still have one token of the same value. There has been a lot of buzz today around non-fungible tokens (NFT), which represent unique, one-of-a kind digital assets such as music or artwork. Cryptocurrency is created through the process of verifying or validating data and adding blocks to the chain. Nodes are rewarded with an uncirculated asset for helping to keep the blockchain healthy and functioning.
Wallets are an important component of transacting cryptocurrency. A cryptocurrency wallet is simply where a related pair of keys (key pair) are stored, while the actual record of your cryptocurrency resides on the blockchain. The key pair consists of a private key and its derived public key. The public key is used to send and receive cryptocurrency and your private key is needed to unlock them. Think of your private key as proof of ownership. There are many different types of wallets used to hold cryptocurrency. Hot wallets are connected to the internet whereas cold wallets are not. Custodial wallets are where your keys are held by someone else, whereas non-custodial means you hold your own keys. Paper wallets are just keys printed on paper, hardware wallets can be USB devices, software wallets can be applications on your computer, and mobile wallets are applications on your mobile device. Most people end up using a combination of wallets. As you can see, there are many options, so it’s important to do your research first.
The first and largest cryptocurrency by market cap is bitcoin. Created in 2009 by an anonymous person or group named Satoshi Nakamoto, bitcoin was the first real use of blockchain. At the time of this article, bitcoin was ranked No. 9 in terms of global value across all assets by total market cap. There are thousands of coins/tokens available today, many of which have legitimate use cases, and many of which do not, so do your research. The use of the word “currency” is a misnomer as cryptocurrency has many functions. Some tokens can be used as governance tokens (making decisions), utility tokens (providing functionality), and of course, as a means of transferring value. It’s clear though that what was once a fringe idea championed by tech-savvy enthusiasts is now being recognized by banking institutions, corporations, and governments.
As someone who has spent many years in nonprofit financial leadership, I am always looking for ways to support the mission of the organization. Once I understood what cryptocurrency was, the question for me was not if we should accept cryptocurrency donations, but how. Let’s look at what this means for a nonprofit and its donors, and how a nonprofit can prepare.
The IRS has classified crypto as property, not a currency or security. This means we treat it like a non-cash asset for donation purposes. There are, however, many similarities to how stock donations are handled.
Donors are looking for creative ways to give that both supports their charitable organization and minimizes their tax liability. If a donor sells crypto that has appreciated in value, they will have to recognize a capital gain on the sale. If, instead, the donor decides to donate that crypto, they will get the double benefit of receiving a charitable contribution deduction while also avoiding capital gains.
For example, if a donor sells cryptocurrency for $100,000 with a $30,000 cost basis, they’ll have a gain of $70,000. If they then donate the proceeds after tax (assuming a 20% tax rate) to a nonprofit, the nonprofit would receive $86,000. If the donor had donated the crypto directly to the nonprofit, the nonprofit would have received $100,000 … maximizing their gift to the nonprofit and increasing their charitable contributions deduction.
If a cryptocurrency is sold or traded, this creates a taxable event, and the difference in value results in a capital gain or loss. Short-term gains (losses) result from the profit or loss from the sale of cryptocurrencies held one year or less. Long-term gains (losses) result from the profit or loss from the sale of cryptocurrencies held longer than one year. When purchasing (or trading) cryptocurrency, the purchase price, less any associated fees, is your cost basis. When selling (or trading) cryptocurrency, the sales price, less any associated fees, is your adjusted sales price.
Once leadership has made the decision to accept cryptocurrency donations, it’s a best practice to adjust the gift acceptance policy to acknowledge that the nonprofit is now accepting cryptocurrency and to specify whether it will be either held or sold immediately.
For most charitable organizations, liquidating cryptocurrency immediately is recommended. Crypto values can swing wildly, potentially reducing the impact of the gift, and most donors intend for their gift to benefit the mission immediately. By liquidating the donation immediately, a nonprofit is protected from any significant swing in value.
Yes. Donated crypto held less than one year disallows the capital gains tax benefit and only allows a deduction on the cost basis instead of the total value of the donation.
For crypto donations valued over $250, a standard noncash donation receipt is required for the donor. For crypto donations valued over $500, the donor must file Form 8283 (Noncash Charitable Contributions). For crypto donations valued over $5,000, the donor must receive a qualified appraisal prepared by a qualified appraiser. Form 8283 must be signed by the charitable organization and the qualified appraiser. A qualified appraisal is not required to be submitted to the IRS unless the donation value is above $500,000. If sold within three years of receiving it, the charitable organization must complete Form 8282 and provide a copy to the donor.
To receive cryptocurrency donations, a nonprofit needs to have a crypto wallet at the ready. This can be done through various means such as setting up a manual wallet (Metamask), through an exchange (Coinbase), or through a cryptocurrency donation platform (Engiven). Manual wallets are not recommended because there are no internal controls in place to safeguard assets and you need to have a fair amount of experience transacting cryptocurrency. Exchanges are not ideal because you have to manually liquidate the gift, they’re not designed to support the processing of donations, and they provide little to no support.
For most nonprofits, the best option is a cryptocurrency donation platform. Using Engiven as an example, when a donor makes a donation, the cryptocurrency is transferred and liquidated on behalf of the nonprofit, and then an ACH deposit is made to the nonprofit’s bank account. The nonprofit never has to interact with cryptocurrency but can still provide a means of giving for their donors. If desired, the nonprofit can also configure their account to hold cryptocurrency when donated and not liquidate it. Upon receipt of the cryptocurrency, the platform will issue an automated gift acknowledgement to the donor and notification to the nonprofit. The IRS Forms 8283/8282 are auto-generated, and the qualified appraisal prepared when applicable. The goal of a platform like Engiven is to do the heavily lifting for nonprofits so they can focus on their mission.
Donating cryptocurrency can be as simple as a few clicks and in many ways just as simple as traditional online giving, but nonprofits can only accept cryptocurrency if they’re ready. In the past year alone we’ve seen a significant shift and adoption of digital assets, and now more and more people are making them a part of their portfolio. Let’s get ready to meet our donors where they already are!
Justin Greene, CPA, is the CFO for Engiven, a cryptocurrency donation management platform, and also CFO for Liberty Live Church, a large multi-site church based in Hampton Roads. Serving 20 years in nonprofit administration and specializing in the economics of blockchain and digital assets, Justin has become a leading voice in helping faith-based and nonprofit organizations step confidently into the cryptocurrency space. He also sits on the VSCPA Innovation Advisory Council.
