The world of cryptocurrency is still in its early stages, but it’s becoming more popular daily. If you’re unfamiliar with cryptocurrency, it’s a digital or virtual currency that uses cryptography for security. Cryptocurrencies are decentralized, meaning they aren’t subject to government or financial institution control. What is a cryptocurrency, and how does it work? Simply put, the digital money that isn’t in the physical form of currency is what it’s all about. Although cryptocurrency is digital, it shares some qualities with paper money in that it can be earned, used, and invested. Bitcoin, one of the most well-known and first cryptocurrencies, was created in 2009. Since then, hundreds of other cryptocurrencies have been created. While Bitcoin remains the most valuable cryptocurrency, others are catching up. Ethereum, for example, is the second largest cryptocurrency by market capitalization.
Cryptocurrency donations are becoming more common as non-profits seek to tap into this new funding source. But should your organization be open to this change?
Here are a few things to mull over before you call on whether or not you will start accepting cryptocurrency donations.
The first is volatility. Cryptocurrencies are notoriously volatile, meaning their value can fluctuate wildly. This means that the value of a donation in cryptocurrency could increase or decrease significantly over a short period of time.
If your organization accepts crypto donations, you’ll need to be prepared to convert them into fiat currency (i.e., traditional currency like dollars or euros) immediately. This way, you won’t be affected by changes in the value of the cryptocurrency.
Another thing to consider is fees. You’ll typically have to pay transaction fees when you accept cryptocurrency donations. These fees can vary depending on the cryptocurrency and the platform you use to accept donations. You need to make sure that you understand the costs involved before deciding whether or not to accept crypto donations.
Finally, you’ll need to be aware of the legal implications of accepting cryptocurrency donation. Cryptocurrency is still a relatively new phenomenon, and its laws and regulations are still evolving. So before accepting crypto community donations, ensure you understand the legal landscape and any potential risks involved.
It would be a great way to tap into a new funding source by accepting cryptocurrency donations. Although, before deciding whether or not to accept them, there are a few things you should take into consideration. Make sure you understand the volatility of cryptocurrencies, the fees involved, and the legal implications before making a decision.
What difference does this make to you? According to Gemini’s 2021 State of U. S. Crypto Report, 21.2 million people in the United States own bitcoin (bitcoin), with an additional 19.3 million anticipating doing so in the following year. Therefore, a single lead can result in a great number of potential contributors! However, to accept the gift, you must be able to do so, and it would be for multiple reasons that this is a brilliant idea.
The tax advantages of donating crypto to a 501(c)(3) organization may be considered for both the donor and the charity. Why? Because giving crypto is comparable to donating a car or artwork, it’s unnecessary to sell anything before donating it. When donors avoid a sale, they also prevent any taxable gains, which may be appealing to someone who purchased crypto early. They not only can bypass a taxable income but could also claim a charitable deduction worth the total market value of the crypto at the date of donation.
For a 501(c)(3) organization, there’s no such thing as a taxable event when receiving crypto. In the same way that they don’t pay taxes on gifts of stocks or real estate, they don’t have to pay taxes on the appreciation of crypto. They would only recognize any tax liability if they sold the crypto after receiving it as a donation.
While donors get a charitable deduction and avoid paying taxes on their appreciated assets, non-profits also benefit because they can keep 100% of the donation. And since most cryptocurrencies are held in wallets rather than exchanges, there’s little to no transaction fee charged by the platforms used to make the donation.
It’s also not just about contributors regarding whether or not your foundation should accept bitcoin. Certain foundations may start allocating crypto grant money, as The Pineapple Fund did in the past, with $55 million in Bitcoin to over 60 non-profits in 2017. As a result, if your organization can take bitcoin, it might be eligible for unique funding.
Although cryptocurrencies may seem complex, they’re actually not. If you choose to receive a cryptocurrency donation, it’s similar to either receiving a stock donation or a credit card payment.
Consider a wallet example:
If you’re looking to set up a cryptocurrency “wallet” to accept donations, be aware that it may require more effort than a traditional stock account. For one thing, crypto wallets can be tricky to navigate. In addition, selling off donated crypto assets may require strong internal controls and sound policies. Most non-profits liquidate crypto as quickly as possible to minimize the risk of losses. One of the significant advantages of this technique is that trading expenses are reduced. The disadvantage is that those with some understanding of cryptocurrency and crypto exchanges would find this technique most advantageous.
Consider a credit card example:
Create an account with a cryptocurrency payment processor. This is comparable to the procedure you followed to accept credit card payments. Crypto payment processors let you take crypto contributions, usually on your website, and convert them into dollars before sending them to your bank account.
Now that I’m convinced, what processes should I put in place on the back end?
Gift acceptance guidelines:
It all begins here. Gift acceptance rules should be updated to define limits for crypto gifts or to donate cryptocurrency. Your development team should be informed that the IRS regards these donations as noncash; thus, any advantage above $5,000 must be supported by a qualified appraisal. Accepting the gift does not require your organization; however, the donor may need this information to claim a charitable deduction.
If you opt to create a wallet rather than using a cryptocurrency payment processor, then your internal controls need to be more robust. Precisely, determine who will have access to the wallet and control over its contents. Additionally, establish how many signatories will be required for any actions taken on the account (i.e., selling assets) and how quickly those assets should be sold after being deposited into the wallet.
While cryptocurrency is still a new concept, it is essential to remember that digital assets constantly evolve. Accountants are still trying to come up with the best way to track and report crypto transactions, but they now treat it like any other intangible asset- such as patents or trademarks.
The easy part is done once the stock has been liquidated. When liquidating stock donations, you’ll need to compute a profit or loss using the same methods as when investing in new companies. This process is more challenging if your company decides to retain it. If it’s kept, it must be assessed to see whether it has a limited or continuing existence.
This may appear to be a lot, but keep in mind that the majority of crypto will be classified as an indefinitely long-lasting asset, which implies that it should be tested for impairment once a year and more frequently if circumstances suggest it is “more than likely” to become impaired. These events might happen throughout the year, possibly resulting in an impairment loss that would affect your surplus or raise your deficit.
It would seem, however, that as cryptocurrency now has a firm foundation in our society and the media, it appears to be complicated and hazardous. The process of mining, investing in, obtaining, and keeping it is a complex series of events that need a lot of expertise. However, if a charity isn’t interested in any of those options, accepting cryptocurrency as a donation might increase your donor pool and raise regular and annual contributions.
Whether you’re a startup organization or a leading corporation, CommunityForce provides fully customizable, all-in-one online grant management solutions to maximize your efficiency, simplify complex processes, and improve collaboration so you can focus on increasing your impact. We’ve helped organizations streamline their entire process no matter the size and scope of their giving.