Charities should address several issues when considering whether to accept donations of digital assets, defined to include cryptocurrency, stablecoins, and non-fungible tokens (NFTs).[1] These include the propriety of such donations in the first place; protocols for accepting digital assets; the conversion of digital assets to U.S. dollars or another fiat currency (and if so, how); and all related documentation and reporting obligations.

Suitability Considerations

As an initial matter, a charity needs to determine whether the value of accepting digital asset donations is greater than the associated risks, and the effort involved in doing so. It must determine whether it is a suitable course of action for the charity to accept donations of digital assets.

Some initial considerations include whether such donations are permissible under applicable laws, whether they are allowed under the charity’s organizational structure and provisions; whether they comport with their mission, and whether digital assets are suitable given their particular financial situation.

Evaluating Whether to Accept Direct Donations

In evaluating whether to accept direct donations, a charity should take the following into account, at a minimum:

• If donations are funnelled through a third-party provider or a donor-advised fund (DAF), it is likely that the charity will receive U.S. dollars (or another fiat currency), not digital assets. This means that the charity avoids setting up a digital asset account or digital wallet, and it does not assume the market risks and expense of converting digital assets to fiat currency. Donations through a third-party provider or DAF can insulate the charity from the reputational risk of association with undesirable donors. One drawback, however, is that there can be the delay between the time of the donor contribution and its receipt.

• Accepting direct contributions of digital assets might increase the charity’s prospective donor pool by attracting some donors who do not want to contribute through a third-party provider or a DAF.

• Accepting direct contributions would subject the charity to swings in value of the digital assets. The charity could benefit from market value increases, but also risk suffering from market value declines.

Policies and Procedures

A charity should consider whether to update its current gift acceptance policies and procedures, or whether it should specifically adopt policies addressing digital assets. Some obvious questions include:

• Can it meet a potential donor’s donation timeline?

• Will it work with a third-party processor or platform to establish a digital asset donation program?

• Which digital assets will it accept? Will it accept NFTs that are not connected to its core mission? For example, should it accept art NFTs if it is not a museum or educational institution?

• If it accepts direct digital asset contributions, will it immediately convert them to U.S. dollars (or another fiat currency)?

• Under what circumstances (if any) would the charity be willing to hold the digital assets after donation? Accordingly, should specific internal investment guidelines be established and followed by the charity?

• Does the charity have policies against accepting anonymous or pseudonymous gifts? Does it require donors to provide information about themselves? The charity must consider its reporting and compliance obligations regarding donor anonymity.

• What procedures should the charity adopt to protect itself from security breaches and hackers? For example, to avoid the risk of an online hacker breach of a public digital wallet address, the charity might require each prospective digital asset donor to complete a confidential information form through secure channels before providing the donor with its wallet address, and subsequently assigning a unique digital address for each donation.[2]

• Should the charity hire a blockchain analytics firm to help analyse transactions and wallet addresses for potential donations? These companies have software products that can allow the charity to see if it might be exposed to criminal activities, reputational risk, money laundering, terrorist financing, and help assess specific donor-related risk management parameters.[3]

Documentation of Donations

A charity that accepts direct donations of digital assets needs to provide its donors with the documentation they require to meet their recordkeeping and reporting obligations:

• For donations valued at less than $250, the charity should provide the donor with a receipt that includes the charity’s name and address.

• Donations of more than $250 require a contemporaneous written acknowledgement.

• For donations of more than $5,000, the charity needs to sign IRS Form 8283, Part V, acknowledging that the charity is a qualified charity under Internal Revenue Code (Code) §170(c) and that it has received a donation of noncash property as described on the form. By signing the form, the charity is not agreeing with the appraised value;[4] rather, it is acknowledging receipt of the donation, and thus meeting its information reporting requirements when it comes time to dispose of the digital assets.[5] (In their turn, the respective donor must comply with qualified appraisal requirements in order to deduct the donation as a charitable donation.)[6]

IRS Reporting Obligations

Digital assets are reported as noncash contributions on Schedule M (Noncash Contributions) of IRS Form 990. If the charity disposes of all or any portion of the digital assets within three years after receipt, it must file IRS Form 8282 (Donee Information Return) and provide a copy of that form to the donor.[7]

Conclusion

As more and more people accumulate substantial appreciated digital asset portfolios and more and more charities establish policies to accept contributions of such assets, several tricky issues need to be considered by charities. With careful attention, these hurdles can be addressed and overcome.

[1] IRS, “Digital Assets,” https://www.irs.gov, site visited November 3, 2023.

[2] Third party service providers are available to serve as middlemen for such transactions. Jane M. Searing and Deby Macleod, Cryptocurrency gift strategies for not-for-profits, Journal of Accountancy, https://www.journalofaccountancy.com/issues/2019/feb/cryptocurrency-gift-strategies-for-nfp.html (Feb. 1, 2019)

[3] See “Top Blockchain Analytics Companies and What They Do,” Analytics India Magazine, July 24, 2020, https://analyticsindiamag.com/top-blockchain-analytics-companies-and-what-they-do/. (site visited May 12, 2021).

[4] FAQ 36.

[5] FAQ 36.

[6] Chief Counsel Memorandum 202302012 (January 10, 2023).

[7] Form 8283.