With the growing popularity of digital currency, many nonprofits have begun accepting such currency as a form of contribution. However, nonprofits which are currently accepting or contemplating accepting digital currency may not be fully aware of the best ways to receive payments or the compelling information needed to educate donors about this option. Friedman’s Nonprofit Practice Leader, Amish Mehta, CPA, Partner, sat with one of the firm’s digital currency experts, Steven Baum, Principal, to discuss critical details to help guide your decision making in this burgeoning space.
Amish Mehta: Before diving into some of the important details, what is cryptocurrency?
Steven Baum: Cryptocurrency is a type of digital currency or digital asset in which encryption techniques are used to regulate the generation of units of currency. These techniques act as a medium of exchange to validate the transfer of assets typically using a decentralized network rather than reliance on a centralized environment, such as the central banking system. The ability to remain decentralized is the basis of the underlying distributed ledger technology, or blockchain, that serves as a public record of transaction history which has occurred on the network. There are a variety of cryptocurrencies, such as Bitcoin, Ethereum and many more. Each currency operates on a specific blockchain network utilizing a unique set of parameters which are agreed upon by the users of each network. In today’s society, cryptocurrency is being used as a means to transact for goods and services, store value, trade as an investment, gift, donate, and in a variety of other ways.
Mehta: What is the best way for nonprofits to structure their organizations to effectively receive digital currency payments?
Baum: If nonprofits are looking to receive digital currency payments as a source of in-kind donations, they will need to first properly educate themselves on the risk associated with accepting these assets. Due to the fact that these types of digital assets are extremely volatile in the market-place, it is important to ensure that the entity understands the significant risks associated with the potential appreciation or depreciation of value. There are many available service providers that will allow organizations to convert their digital currency into cash almost immediately. These service providers that allow for merchant processing are similar to credit card companies and other solution-to-transact payments. Most merchant processors will charge small fees to assist with the receipt and conversion of these assets. Using a merchant processor will decrease the risk of the entity having to hold and store these assets themselves.
If an entity plans to receive digital currencies directly, hoping for appreciation of value, it is extremely important that the entity understand how to securely store these assets to mitigate the risk of theft or loss. Since each currency is unique, it is important to understand the parameters and technology behind how each currency is transferred before taking on the risk of storage.
Mehta: What should a nonprofit consider when determining the best providers for them?
Baum: As a nonprofit entity you should always align with businesses that demonstrate integrity and values compatible with the entity. It is important to do a search for service providers in the industry and gain an understanding of their unique service offerings. The nonprofit entity should review the service providers’ credentials and reputation in the industry to ensure they are working with a leader in the space. It is also extremely important to make sure that your existing partners such as banks and other service providers are comfortable with the entity receiving funds from payment processors in the digital currency industry. Some merchant processors in the market-place include Coinbase, BitPay, Coinify
Mehta: How do fees associated with accepting digital currency donations compare to other third party or credit card processing fees?
Baum: Fees associated with these service providers should be similar or potentially cheaper than fees charged by other providers that engage in processing transactions such as credit card processors. Nonprofits should perform their own due diligence around the industry to ensure the entity is getting a fair price that is consistent across the industry for the service being provided.
Mehta: How should nonprofits consider donations via digital currency as they relate to the gift acceptance policy?
Baum: Nonprofits must know from whom and where the digital currency donations are generated and how the third party received those digital currencies. Similar to any gift acceptance policy currently in place with the entity for cash contributions, it is important to ensure that the entity is receiving gifts from parties of good integrity and from reputable sources. Certain service providers may offer protection or security if funds come from bad actors; however, the ultimate responsibility to ensure the digital currencies received were not obtained through theft falls on the nonprofit. It is imperative that nonprofits establish clear procedures to authenticate donors who gift in
Mehta: The IRS stated that digital currencies are considered property. What does that mean for donors?
Baum: Instead of selling digital assets and donating after liquidation, there may be huge benefits for donors to contribute appreciated assets. In 2014 the IRS issued a publication which determined that digital currencies are to be treated as property for federal tax purposes. If donors are planning to contribute digital currency, they may be eligible for an itemized deduction based on the fair value of the digital currency at the date of the donation. Due to the nature of cryptocurrency markets operating
Mehta: How does a donor’s deduction relate to the length of time that they’ve held the digital currency?
Baum: Since digital currencies are considered property by the IRS, the length of time the donor holds these assets will have an impact on the amount of their allowable deduction. As a general rule, in order to receive the benefits of not paying tax on appreciated unrealized gains, the donor is required to hold the digital currency for more than twelve months. If the donor holds the digital currency for in excess of twelve months, the donor will receive a deduction of the fair market value and will be exempt from paying capital gains tax on the appreciation. If the donor holds for less than twelve months, the donor will receive a deduction based on the cost basis and not the fair market value. These rules are general; each donor’s case is unique depending on their specific tax circumstances. You should consult a tax advisor when determining the tax impact of donating appreciated property.
Mehta: How does
Baum: International donations of digital currency would be treated the same as any other donation that would be received from abroad. The major impact that digital currency may have concerns ease of transfer compared to wire transfers from abroad. Since digital currencies are decentralized and can be accessed in many countries, the ability to transfer currency from abroad is typically instantaneous and fees can be significantly less than currently in place with international payment rails.
If you are interested in learning more about how you can benefit from accepting