Financial Literacy for Nonprofits
Accepting Crypto Donations Is Safer Than Ever for Nonprofits:
Safeguards and Considerations to Increase 501(c)(3) Revenue
With nonprofits struggling hard in the wake of the coronavirus pandemic and its economic impacts, adapting to circumstances is more critical than ever before. Fundraising is always a key challenge for nonprofits, but this problem has only escalated as donor contribution availability has become more limited.
Media coverage has documented how nonprofits have emerged destabilized despite, as The Wall Street Journal notes, their efforts being needed more than ever. Fundraisers have been cancelled and government contracts are getting cut as budgets are being adjusted. At best, federal support through initiatives like the Paycheck Protection Program protect jobs in the short-term.
Nonprofits need more for long-term survival: they need consistent funding sources. But with the competition for foundation grants and other sources of funding at an all-time high, and with businesses struggling to survive through hard times, nonprofits have it even harder.
Fiat Currency Is Not The Only Option
Cryptocurrency adoption continues to be on the rise. Deutsche Bank has reported projections of 200 million cryptocurrency users worldwide by 2030, with the crypto hardware wallet industry expected to continue to grow in parallel by an annual 25%.
Blockchain, the technology behind cryptocurrency, continues to be implemented by more and more businesses. Major accounting firms like Deloitte and PwC have been reporting on the increasing adoption of blockchain across major players in all industries.
While fiat currencies like the dollar have suffered in global crises like the coronavirus pandemic and the potential economic downturn, crypto has boasted strong performance across the board.
Experts are noting cryptocurrency’s strength. Blockstream CEO Adam Back notes an ongoing rise in price for Bitcoin. As he told Bloomberg:
“It might not require additional institutional adoption because the current environment is causing more individuals to think about hedging,” Back said. “And retaining value when there’s a lot of money printing in the world.”
Back is not the only one speaking of the promising future of cryptocurrency while fiat currency struggles. BitMEX co-founder and CEO Arthur Hayes is optimistic about a bull run for cryptocurrency by the end of 2020 being exacerbated by the way governments worldwide handled the hardships of the first half of the year. He spoke with Cryptoslate about this:
“Everyone knows the shift is upon us, that is why central bankers and politicians will throw all of their tools at this problem. And I will reiterate, that is inflationary because more fiat money will chase a flat to declining supply of real goods and labour. There are only two things to own during the transition to whatever the new system is and that is gold and Bitcoin.”
When many economists and financial experts are worried about how fiat currencies will before, cryptocurrency remains viable and promising.
The benefits of crypto donations
For nonprofits, cryptocurrency donations can offer a wide range of benefits beyond the most obvious—revenue, or more specifically, another source of it beyond dollars.
- Diversification – Although taxable by the IRS, cryptocurrency is not guided by the hand of central organizations like the Federal Reserve or by the stock market and other drivers of fiat performance. Crypto has shown strong performance while analysts speak of a recession, and so accepting crypto donations could keep a nonprofit from going under, potentially protecting against the volatility of traditional markets.
- More money goes to 501(c)3 – With low-to-no processing fees, accepting cryptocurrency donations means more money actually ends up in your nonprofit’s hands.
- Cost-effective and transparent – Blockchain’s public ledger keeps track of where crypto has been and where it goes, and it is not susceptible to tampering without raising eyebrows. The flow of money (crypto) is transparent, without requiring a third-party institution or app and without facing any additional fees or costs. Additionally, the use of crypto tokens can be tracked; this facilitates transparency from the nonprofit and might even make contributing more attractive for potential donors.
- Leading security – With the tech industry so focused on crypto and blockchain related problems, some of the world’s best programming minds are tackling issues of security. This means cutting-edge protection to address even the newest vulnerabilities.
- Anonymous donors, transparent sources – Although the public ledger keeps track of transactions, the specific identities of individual holders does not necessarily have to be tied to personal identification. Cryptocurrency can allow for truly anonymous donations made with clean assets.
- Global audience – Whether donations are made to organizations with international reach or come from overseas donors, logistics and fees do not keep crypto contained to specific borders. This creates more opportunities for donations to make a positive impact, and a wider pool of donor sourcing that spans the global.
How to stay safe with cryptocurrency donations
If you are a non-profit interested in accepting cryptocurrency donations, you are likely wondering how to vet them. After all, fiat currency is standard and familiar; we all grow up and learn about the dollar in school. Cryptocurrency is new and may seem complicated or even intimidating.
The good news is that, in order to safely use it, you actually don’t need to know every last technical detail about how cryptocurrency works; this is much like how you don’t need to have a nuanced understanding of factors driving the dollar’s value or even economic principles in order to go to the store and pay with a dollar bill.
But if you are responsible for accepting your nonprofit’s donations, you likely have a certain set of steps to vet donors. How do you vet cryptocurrency donations in order to make sure that your donors are legitimate and that the contributions are safe to receive?
The answer actually lies in identifying the potential concerns in the process of accepting cryptocurrency donations, and then systematically addressing each one. There are some steps that nonprofits tend to take when successfully receiving cryptocurrency, and which we have outlined below.
- Know about “anti-money laundering” and “know your customers” regulations.
Although cryptocurrency has appeared on the financial scene ready to disrupt “the establishment” and make everyone reconsider the financial basis of the currency they use, it is not the lawless free-for-all some negative media hype would like you to think. How can you tell if certain crypto platforms are legitimate?
One way is to look for compliance with anti-money laundering (AML) regulations. Businesses that comply with AML guidelines actively monitor transactions for suspicious activity, and have both protocols and audits in place as safeguards to detect and shut down any illegal players.
“Know Your Customer” (KYC) refers to a business practice where customer identities are verified using some form of official, government-issued identification. This is usually a component of the customer onboarding process.
How does this help your nonprofit? As you pick the platform that you use to accept crypto donations, keep AML and KYC in mind. Look to work with crypto companies that comply with both, and feel free to ask them directly about it. Some nonprofits like UNICEF rely on the Principles for Digital Development.
- Pick a well-known platform to accept donations.
The easiest way to accept crypto donations is to sign up for a third-party processing platform, and then incorporate their platform into whatever donation portal you are currently using.Fortunately, most major donation portals have begun to catch on to accepting cryptocurrency. They may have partnerships in place which will likely give you the most seamless experience in accepting crypto, or they can refer you to platforms that they recommend.You can always choose to either hold on to your cryptocurrency or to convert it into another currency. Because you are a 501(c)(3), many major processors will convert donations for you at no additional cost.
Between that and the fact that crypto donations incur low-to-no transaction fees (unlike the steep fees of credit cards), you may find major savings in receiving crypto as opposed to fiat currency contributions.
- Invest in a hard wallet to keep the donation safe.Short for “hardware wallet,” a hard wallet is considered to be safer than a software wallet because it is less susceptible to hacks. These hardware wallets may be disconnected from the internet and any internet-connected devices when transactions are not being executed, at which point they are impenetrable to virtual hackers.
- Get a financial advisor who’s experienced with cryptocurrency.
There is some risk involved with cryptocurrency. Its price performance can be volatile, after all. Some people are apprehensive about the fact that it is not backed by any specific government. Media attention over the past few years has focused on crypto scandals over successes, and created some negative public prejudices against digital currencies.Fortunately, no individual, organization, or business has to tackle the topic of crypto on their own. A financial advisor who is well-versed in crypto can help you navigate your nonprofit goals and determine a sound strategy for handling these donations.For example, an experienced advisor can help you determine whether it is preferable for your 501(c)(3) to hold assets as cryptocurrency—and, if so, for how long as well as contingent on what—or if you should convert to cash.
- Engage with other nonprofits who have already accepted crypto contributions.A growing number of other 501(c)(3) organizations have begun to accept donations in the form of cryptocurrency. Connecting with non-profits in your vertical or in your geography can shed light on any specific issues you might be inclined to face.You can benefit from the other non-profits’ experiences and learn how to handle your contributions better, while also connecting with others who are striving to make a difference in the world.
Of course, keeping your nonprofit safe and compliant does not just include care in the donations you receive, but also in how you report your revenue and adhere to the IRS’ rules and guidelines. In the next section, we’ll cover the key considerations that both nonprofits and donors need to keep in mind surrounding cryptocurrency donations.
Tax considerations surrounding accepting crypto donations
Nonprofit organizations are increasingly accepting Bitcoin and other cryptocurrency donations because of the favorable taxes and fees. The IRS categorizes crypto as property, which means taxes on crypto donations are treated the same as donations of stocks, with lower tax rates than U.S. dollar donations. However, unlike stock donations that have high broker fees, crypto contributions typically have low fees.
Real-world concerns around crypto donations
Below, we’ll review some of the key considerations for both donors and recipients. At TokenTax, we’ve explored these as well as other crypto tax-related concepts in more depth in our e-book, Cryptocurrency Taxes in the U.S. — The TokenTax guide to all things crypto taxes. We are making the e-book available for donations in the crypto of your choice with all proceeds going to the 501(c)(3) organization Black and Brown Founders. The e-book download displays after you enter your email on the TokenTax donation form. Feel free to use it to learn more about crypto taxes, guide your questions, or even just for your reading enjoyment.
How do crypto donation taxes function from a giving perspective?
Unlike cryptocurrency taxes on most transactions, crypto taxes on donations are highly favorable for both the donors and the receiving charities.
What’s in it for donors?
There are no capital gains taxes on donated crypto, unlike the high tax rates on fiat charitable donations. The IRS 2019 Frequently Asked Questions on Virtual Currency Transactions (Question 33) clarified that there no taxes on charitable contributions of Bitcoin or other crypto:
“If you donate virtual currency to a charitable organization described in Internal Revenue Code Section 170(c), you will not recognize income, gain, or loss from the donation. For more information on charitable contributions, see Publication 526, Charitable Contributions.”
Additionally, the full amount of the donation is tax deductible. The IRS 2019 Frequently Asked Questions on Virtual Currency Transactions clarified the crypto deduction calculation:
“Your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year. If you have held the virtual currency for one year or less at the time of the donation, your deduction is the lesser of your basis in the virtual currency or the virtual currency’s fair market value at the time of the contribution. For more information on charitable contribution deductions, see Publication 526, Charitable Contributions.”
What are the challenges for donors?
For tax filing purposes, donors need to report their deductible donations on Form 8283 – Non Cash Charitable Contributions if the amount is USD 5,000 or more. Donors should also ask the charity for written acknowledgment if the donation is USD 250 or more. In case they are audited, donors should store this written confirmation with their other tax records. The IRS 2019 Frequently Asked Questions on Virtual Currency Transactions provided more details on the crypto contribution thresholds and tax reporting requirements:
“A charitable organization can assist a donor by providing the contemporaneous written acknowledgement that the donor must obtain if claiming a deduction of $250 or more for the virtual currency donation. See Publication 1771, Charitable Contributions Substantiation and Disclosure Requirements (PDF), for more information. A charitable organization is generally required to sign the donor’s Form 8283, Noncash Charitable Contributions, acknowledging receipt of charitable deduction property if the donor is claiming a deduction of more than $5,000 and if the donor presents the Form 8283 to the organization for signature to substantiate the tax deduction. The signature of the donee on Form 8283 does not represent concurrence in the appraised value of the contributed property. The signature represents acknowledgement of receipt of the property described in Form 8283 on the date specified and that the donee understands the information reporting requirements imposed by section 6050L on dispositions of the donated property (see discussion of Form 8282 in FAQ 36). See Form 8283 instructions for more information.”
How do crypto donation taxes work from the perspective of the recipient non-profit organization?
Overall, Bitcoin taxes for organizations can be confusing. However, most provisions make sense if you consider that Bitcoin is treated as property similar to stocks and real estate.
What are the benefits for nonprofit organizations?
The main benefit of accepting donations in Bitcoin or crypto is that donors can pass their savings on taxes and fees on to the charity of their choice.
For example, say a donor planned to give a charity USD 10,000. After taxes, the charitable portion of that amount is higher if it is in crypto compared to cash because there are no capital gains taxes. This is what is frequently referred to as crypto donations “having more bang for your buck.” Additionally, crypto donations provide increased sources of funding for charities.
Example based on if you made a donation after holding crypto for one year and trading to USD to complete donation in USD.
What are the challenges for nonprofit organizations?
At this point in time, the main challenge in accepting donations of cryptocurrency is reporting the donations on taxes. However, accepting donations of fiat currency also requires detailed tax reporting, so this isn’t exactly a new problem for non-profits to have on their radar.
The IRS 2019 Frequently Asked Questions on Virtual Currency Transactions provided instructions on crypto tax reporting requirements for non-profit organizations:
“A charitable organization that receives virtual currency should treat the donation as a noncash contribution. See Publication 526, Charitable Contributions, for more information. Tax-exempt charity responsibilities include the following:
- Charities report non-cash contributions on a Form 990-series annual return and its associated Schedule M, if applicable. Refer to the Form 990 and Schedule M instructions for more information.
- Charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property (or any portion thereof) – such as the sale of virtual currency for real currency as described in FAQ #4 – within three years after the date they originally received the property and give the original donor a copy of the form. See the instructions on Form 8282 for more information.”
Creating a way to receive and store crypto may seem daunting if no one on your charity’s team has ever created a crypto wallet or payment form, but it is fairly simple. For reference, the TokenTax crypto tax book example donation link took less than 15 minutes to create through Coinbase. Feel free to reach out to BitIRA or TokenTax if you need help setting up crypto donations and completing your relevant taxes.
Major nonprofits are accepting cryptocurrency donations
The number of nonprofits accepting cryptocurrency donations is on the rise, with major nonprofits certainly paving the way forward for the rest of the community. Although 2019 saw an increase in nonprofit players receiving Bitcoin and other cryptocurrencies from donors, the financial tumult triggered by the coronavirus pandemic certainly seems to have pushed other 501(c)(3) organizations to follow suit.
If you are wondering whether to start accepting crypto donations, you might be interested to discover that you’d be in good company. There are many well-known 501(c)(3) organizations that actively seek out crypto donations. While the list continues to grow, some groups already on there include:
- Black and Brown Founders – https://blackandbrownfounders.com/
- Charity Navigator – https://www.charitynavigator.org/
- Dementia Society of America https://www.dementiasociety.org/
- The Electric Frontier Foundation – http://eff.org/
- The Human Rights Foundation – https://hrf.org/
- Humanity Road – http://humanityroad.org/
- Internet Archive – http://archive.org/
- Khan Academy – https://www.khanacademy.org/
- Lupus Foundation of America – https://www.lupus.org/
- Mercy Corps – https://www.mercycorps.org/
- No Kid Hungry – https://www.nokidhungry.org/
- The Red Cross – http://redcross.org/
- Save the Children – http://savethechildren.org/
- Unicorn Riot – https://unicornriot.ninja/
- United Way – http://unitedway.org/
- The Water Project – https://thewaterproject.org/
- Wikimedia – https://www.wikimedia.org/
The fact that the IRS has released guidance specifically addressing nonprofit cryptocurrency donations supports the notion that this is a fundraising mechanism that is here to stay. Looking at the size and magnitude of nonprofits that have followed suit in accepting nonprofits, it becomes even clearer that this is not a passing fad.
And with the number of people holding crypto only continuing to grow as its performance endures alongside a volatile dollar, it wouldn’t make sense for this to be merely a trend.
There are already heavily used platforms for accepting virtual currency contributions. CPAs and other financial professionals have been receiving official guidance on how to document and handle such contributions legally. With validated infrastructure in place for accepting crypto, and success stories as several major nonprofits continue to accept digital currency donations, why not do the same?