Before deciding whether your not-for-profit organization should accept cryptocurrency for gifts, you must understand what it is. A cryptocurrency, or virtual currency, is a digital medium of exchange that can be used for purchasing, selling, and storing value, but it is not backed by a sovereign government.
In that light, bitcoin, ether, syscoin, and litecoin are among the best-known cryptocurrencies, but there are more than 2,000 cryptocurrencies listed on Coinmarketcap.com, with varying degrees of popularity.
The U.S. Treasury currently classifies cryptocurrency as intangible property or a commodity. Despite the name, it is not a currency and does not have legal tender status in any jurisdiction. The technology underpinning cryptocurrencies is blockchain, which is a "distributed ledger technology." This decentralized general ledger system in theory removes the need for banks and governments for security and regulation.
Technically, cryptocurrencies are one of several types of digital tokens that have caught on with the public and caught the eye of regulators. For example, the two digital tokens, aka cryptoassets, with the largest market capitalization are bitcoin, a true cryptocurrency, and ether, which is defined by the SEC as a utility token. However, the most prominent class of digital tokens is cryptocurrencies and while there are differences among types of digital tokens, they are not essential in understanding the issues raised in this article. Thus, for the sake of simplicity, the blanket term cryptocurrency will be used.
The authors are not advocating for or against accepting cryptocurrency. This article focuses on the key decisions needed once the not-for-profit organization determines it will accept this type of gift. After the decision is made, the organization must decide whether it will accept the asset directly or indirectly through a third-party facilitator and, if accepting this asset class directly, how to do so safely and securely. The four steps organizations may take to get ready to accept this new class of asset are:
- Review and update the organization's gift acceptance policy;
- Set up systems, accounts, policies, and procedures to accept and secure this class of asset;
- Adopt accounting policies and adjust the chart of accounts as necessary to properly account for this class of asset if it cannot be readily converted to cash (this article does not address accounting practices, as accounting guidance for cryptocurrency is being evaluated by an AICPA working group); and
- Understand and implement systems for gathering information needed to comply with all reporting requirements associated with accepting this class of asset.
GIFT ACCEPTANCE POLICY UPDATE
The first decision is whether the organization wants to accept this class of asset as a charitable gift (see the sidebars "The Case for Accepting Cryptocurrency Gifts" and "The Case Against Accepting Cryptocurrency Gifts" at bottom of page). Not-for-profit boards have fiduciary responsibilities for donated assets, and some may decide that cryptocurrencies offer enough uncertainties and unknowns to make exercising that fiduciary duty difficult. The decision to accept this class of asset is a board decision that should be reflected in board minutes and then implemented by the organization's management.
If you determine the organization does not want to accept this class of asset directly, the organization can still encourage donors to use a donation-facilitating organization acting as an agent of either the donor or the organization. If the facilitator is acting on behalf of the donor, this could be a donor-advised fund (DAF) sponsor. Many DAF sponsors are equipped to accept most types of property, including cryptocurrency. There may be a delay between the time the donor makes the gift to the DAF sponsor and the time the gift is ultimately advised to your organization because, as noted above, it can take time to convert this type of property to cash depending upon the cryptocurrency donated and its liquidity. This could affect the gift's value.
Alternatively, your organization can contract with a facilitating organization to act as its agent to accept cryptocurrency on its behalf, convert this type of property to cash, and remit the cash net of fees. This relationship is like using an agency to accept donated used automobiles. The donor receives a donor acknowledgment letter from the charity. However, the facilitating organization conducts the transaction on behalf of the charitable organization.
SAFEGUARDING GIFTED ASSETS
Once the board decides to accept cryptocurrencies, here are some quick implementation tips and safeguards to protect this asset. As a form of digital currency (classified as "property"), bitcoin and other cryptocurrencies exist only electronically. The crypto donation will arrive in the form of an email or Quick Response (QR) code that the organization will need a "digital wallet" to decipher. A "wallet" is software or an application downloaded to either a phone (mobile device) or a desktop computer that stores the public and private keys used to send and receive digital currency. The wallet is like a bank account for cryptocurrency, and you must have one before accepting the asset. If someone sends you cryptocurrency before you have a wallet, those tokens may not be recoverable.
Using a secure computer with two-factor authentication is a good practice. Cryptocurrency is not actually "stored" in a wallet. Instead, a private key (secure digital code known only to the organization and its wallet) is stored that shows ownership of a public key (a public digital code connected to a certain amount of currency). The public and private keys have a mathematical connection to each other, allowing you to share your wallet address without sharing all of your wallet information. The public/private key pair enables verification, as a transaction includes the public keys of the sender's and recipient's wallets, with the connection to the respective private keys being used to verify. The organization's wallet stores its private and public keys, allowing it to send and receive cryptocurrency (coins or tokens). The wallet acts as a personal ledger of all transactions to which it is a party. The organization must have systems in place for protecting these keys so they are not lost, stolen, or misappropriated.
When your organization sets up its wallet, it must share some sensitive data elements such as email addresses; cellphone numbers; identifying information for U.S. bank accounts, credit cards, or another similar payment service such as PayPal; tax identification number; and other forms of identification. A data classification policy, which provides the level of security and controls required to share these data outside of the organization, is a necessity. Risks to be taken into account include the vulnerability of wallets when keys aren't adequately protected or are stolen in a cyberattack.
Because banks have been known to freeze accounts with cryptocurrency activity, the organization might set up a separate bank account or related credit card account for the sole purpose of receiving and processing the crypto donations into cash. It's important to apply security features such as dual approval and restricted access as a requirement for these accounts.
Cryptocurrencies are vulnerable like any other data asset on the organization's network, especially systems that have access to the internet. This includes online wallets, exchanges, wallets on employee computers, cloud storage of private keys, and mobile applications.
To prevent theft of cryptocurrencies, the use of cold storage (an offline archive of private keys) is recommended. This means basically taking them off the network. Top cold storage methods include an offline hardware wallet (a specialized device), a USB drive, or a paper wallet. Per the organization's gift acceptance policy, your organization will want to liquidate crypto donations as soon as possible, reducing the need for storage and the risk of loss.
Alternatively, if the organization makes the conscious decision to hold on to the donation in cryptocurrency, then investment policy, storage, and security procedures around accessing this digital asset need to be established. This would be addressed under investment and asset control policies.
Some wallet providers, such as Coinbase, act like a brokerage account, meaning you never have to worry about the private keys. However, you do want to use cold storage if you're using a traditional wallet.
Because cryptocurrency operates on open blockchain networks and is facilitated over wallets and exchanges that require two-factor authentication, the person responsible for managing these items will receive various notifications and verification requests. Appropriate security awareness training over these procedures and alertness for phishing emails or smishing text messages (which allow hackers to attack your cellphone) are crucial. Additionally, protect your organization by:
Using multiple wallets: There is no restriction on the number of wallet addresses an organization can use. Some holders of cryptocurrency generate a new address every time they send or receive cryptocurrency, to reduce the risk of loss.
Keeping only small amounts in a web wallet: Web wallets are targets for hackers. Keep only a small amount of cryptocurrency protected by a password in each wallet. Wallets held on computers are also vulnerable. Use cold storage to hold large amounts of cryptocurrency.
Obeying a no-share policy: Never share your organization's private keys for your cryptocurrency with anyone. Doing so gives them full access to your organization's funds.
Generally, for tax purposes, a contribution of cryptocurrency will be treated as a noncash contribution, and the cryptocurrency must be valued at the time of the contribution. If the asset is immediately converted to cash upon receipt, the contribution and the conversion to cash are treated as two separate transactions for tax reporting purposes. The conversion transaction will be treated as a sale of property.
The organization will likely be asked to sign a Form 8283, Noncash Charitable Contributions, acknowledging receipt of the asset. The organization should also provide a signed donor acknowledgment letter providing the donor (or the donor's agent) with the required items necessary to take a federal deduction for a charitable contribution (see the sidebar "What Should Be in a Donor Acknowledgment Letter" at bottom of page).
Although the organization does not value the gift for donor acknowledgment purposes, the organization must value the gift for its own internal financial reporting and tax reporting purposes. This is not information the organization should share with the donor, as it could impact the donor's preparation of his or her income tax return. If the donor relied upon this information, it could cause the organization to incur penalties if the donor used the information and it resulted in the incorrect overstatement of an income tax deduction later disallowed by the IRS.
A NEW ASSET WITH STAYING POWER
Like other assets, such as marketable securities just a few years ago, cryptocurrency is likely to be with us into the future. Therefore, organizations should consider if they want to accept it as a class of asset, either as a gift directly or through a facilitator. If a not-for-profit decides to directly accept this class of asset, implementing policies and procedures is necessary to safely propel the organization into the future.
The case for accepting cryptocurrency gifts
Arguments in favor of accepting cryptocurrency include:
- This is a type of property that is likely to be with us for the long term. Therefore, organizations may find they need to accept the asset either directly or indirectly through a facilitator.
- Donors want to make gifts of appreciated assets without recognizing gain on the appreciation. Cryptocurrency fits this class of asset.
- Once you understand the basics, this is just another type of property. It is not a particularly special type of property. It is more a matter of having a system in place to convert it to cash so you can put the gift to use as quickly as possible.
- If you have systems in place making it easy for donors to transfer assets to your organization, you will be an attractive recipient of gifts from sophisticated donors.
The case against accepting cryptocurrency gifts
Some arguments against accepting cryptocurrency are:
- More than 2,000 cryptocurrencies are listed on Coinmarketcap.com. Accommodating them all would be a logistical challenge, and their rapidly changing values make them a risky asset class to hold even briefly.
- Some cryptocurrencies may not be readily convertible to cash. Therefore, the organization must determine if it will accept the asset if it cannot convert it to cash and put it to use for the organization's charitable purpose. The accepting charity should be cautious and aware that it may need to use other assets of the charity pending liquidation of the cryptocurrency.
- The charity may want to limit the amount of this class of asset it is willing to accept or hold at any time within its overall portfolio to help mitigate the risk of loss of value due to the current volatile nature of the asset class. However, limiting concentrations of any specific asset class applies generally to all portfolios.
- This class of asset is an anonymous asset. The organization may have a policy of not accepting anonymous gifts. The organization may not be able to vet every donor. However, if the donor is known to the organization, the gift is not anonymous. If both the donor and the asset are anonymous, the organization may want to have a policy strictly for public relations purposes. An anonymous gift could be a fine gift. However, it could be a gift from a donor with an "image problem" who may not stay anonymous. What are your organization's terms for accepting an anonymous gift? Must the donor commit to staying anonymous? What if the money came from ill-gotten gains? Experts say ransomware hackers, for example, often demand to be paid in cryptocurrency, which can be used as an exchange for many criminal endeavors. Many gift acceptance policies do not address this issue because it has never arisen. Your policy does not need to address every possible hypothetical if it is currently considered unlikely or remote. It is acceptable to wait until a specific circumstance arises or is likely to arise. However, addressing the issue of anonymous gifts may be general enough to cover cryptocurrencies.
What should be in a donor acknowledgment letter
Final regulations issued by the IRS on July 30, 2018, for documenting noncash contributions will apply to donations of cryptocurrency (see the chart, "IRS Noncash Contribution Documentation Rules"). The regulations make clear that for gifts exceeding $5,000, a donor acknowledgment letter; a signed Form 8283, Noncash Charitable Contributions; and a qualified appraisal will be required for a donor to substantiate a charitable contribution deduction. The signed Form 8283 is not a substitute for the donor acknowledgment letter from the charity.
A donor acknowledgment letter is required for any contributions of $250 or more and must include:
- Date of donation.
- Name of the donor (or the agent managing the gift on behalf of the anonymous donor).
- Description of the donated asset (but not the value).
- Name and tax status of the recipient organization.
- Any restrictions on the gift that might affect the gift's value.
- The value and a description of any goods or services provided in exchange for the gift or, alternatively, a statement that no goods or services were provided in exchange for the contribution of the gift.
The Form 8283 is prepared by the donor and must be attached to a tax return for any noncash gift valued at more than $500 for which a donor wishes to take a charitable deduction.
For gifts with a value of $501 to $5,000, donors need only complete Section A of Form 8283; a qualified appraisal is not required. The Form 8283 must be attached to the tax return for which a charitable contribution deduction is claimed.
For gifts valued over $5,000, barring a few limited exceptions including marketable securities but not cryptocurrencies, donors must obtain a qualified appraisal and complete Section B of Form 8283 and attach the qualified appraisal to the tax return on which the charitable deduction is claimed. The rules for what constitutes a qualified appraisal are detailed and complex. Donors should pay careful attention to the regulations if noncash contributions of substantial value are made.
In addition, the new regulations make clear that for any tax filings made after July 30, 2018, if the donor is not able to use the full charitable contribution deduction in the year the gift is made and is using the five-year carryover, the donor must attach the Form 8283 (whether Section A or Section B is used), and for gifts over $500,000, the qualified appraisal must also be attached to the tax return for any year in which the carryover deduction is claimed.
IRS noncash contribution documentation rules
Final IRS regulations issued July 30, 2018, have different requirements for documenting noncash contributions, depending on the value and type of noncash gift:
About the authors
Jane M. Searing, CPA, MST, and Deby MacLeod, CPA, CGMA, are shareholders with Clark Nuber in Seattle.
To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA's editorial director, at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.
- "CPAs' Top 5 Questions About Blockchain, Cryptocurrencies," CPA Insider, July 23, 2018
- "Bring Cryptocurrencies Into the Accounting Classroom," Extra Credit, April 10, 2018