Here’s what two of the top experts on tax and regulatory issues in the nonprofit world most often tell their nonprofit clients about how to handle donations of cryptocurrency: “It depends.”
Here’s everything you need to know about the newest frontier in fundraising and giving.
Daniel Figueredo, head of the nonprofit industry group at the accounting firm BPM, and Tami McInerney, BPM tax partner, say the currency is so new, guidance from federal agencies so slim, and state regulations so scattered that there can be a lot of discussion — and different reasonable conclusions — about how to handle various aspects of receiving, storing, exchanging, investing, and reporting contributions made with digital assets.
The Internal Revenue Service considers cryptocurrencies property. The Securities and Exchange Commission says they may be securities. The Commodities Futures Trading Commission considers Bitcoin and certain other virtual currencies to be commodities.
Some businesses and consumers treat cryptocurrencies like money. In the accounting world, where the organization that sets industry standards has not issued formal guidance on how cryptocurrency should be accounted and reported, it is being treated in various cases as an investment, inventory, currency, or an intangible.
To help settle some of that, BPM recently joined other practitioners from industry and CPA firms around the country as founding members of the Accounting Blockchain Coalition to be a resource and sounding board for regulators and to help establish standards for the industry.
In the meantime, here are some things that Figueredo and McInerney say charities accepting cryptocurrencies should do:
Consider outside appraisals. The IRS considers cryptocurrencies to be property, not qualified appreciated stock. Rules apply that donors need a written appraisal from a qualified appraiser to establish the fair market value of gifts over $5,000.
Try to identify anonymous donors. The IRS has reporting requirements for contributions of a certain amount, so nonprofits should do what they can to learn the identity of cryptocurrency donors who give anonymously.
Also, the U.S. Treasury has “know your customer” rules, and nonprofits may need to reference its Financial Crimes Enforcement Network, which provides a sanctions list of organizations and individuals barred from financial transactions.
Determine exposure to IRS rules on offshore gifts. If nonprofits accept cryptocurrency that is held or exchanged through an account outside the United States, IRS requirements for nonprofits to report foreign bank accounts may apply.
Check state requirements. In addition to federal rules, various state regulations governing banking, trust laws, money-transmitter licensing, and other financial transactions — as well as laws against money laundering — may apply in different circumstances based on whether and how nonprofits accept, hold, and exchange cryptocurrencies.
Establish gift-acceptance policies. In the absence of stronger guidelines from government agencies or the accounting industry, charities are advised to craft their own gift-acceptance policies that set out how they will handle assets, anonymous donors, and reporting practices.
Convert cryptocurrency to cash right away. For now, the safest and easiest thing for charities to do is to receive cryptocurrency gifts already exchanged into dollars — through services like BitPay — or immediately sell the donated coins, converting them to dollars, just as they likely do with gifts of publicly traded stock or other non-cash assets. Keeping cryptocurrencies as an investment would introduce other complications beyond just dealing with the volatility of their value.
But as cryptocurrencies gain a growing foothold in the markets — more than 300 crypto hedge funds and venture-capital funds have been launched — nonprofits may find them in their investment portfolios anyway.
“You should know your exposure and know your risk appetite,” Figueredo says. “The future is here, and we all need to figure it out.”
